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What to Buy When Sanity Returns

10/21/2008 1:00 pm EST


Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry, editor of The 25% Cash Machine, says a high-yielding coal stock looks attractive at today’s depressed prices.

At this moment, I think logic has been thrown out the window, but my gut tells me we should be adding to positions that appear to have long-term value and stop worrying too much about these wild day-to-day swings.

So much of the money that has been targeted for “repair” by the Federal Reserve, the Treasury and the central banks has yet to even get into the system. But when the measures do start freeing up the credit markets, most people will find themselves looking back at major averages that will have already jumped.

It hurts to look at our monthly statements, but now is the time when stocks’ price/earnings (P/E) ratios are trading at steep discounts to their long-term growth rates.

As Warren Buffett buys into Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE), and Mitt Romney’s Bain Capital hedge fund cherry-picks toxic assets at pennies on the dollar, much of the rest of the investment world is freaking out and then punching out of the market. It should sound familiar because we’ve been here before.

By now, most of you know that I’m a long-term bull on coal—both coking coal for utilities and metallurgical coal for making steel—and the sudden downturn in growth rates from emerging markets has impacted coal producers and their suppliers. That’s understandable, and as the economy rebounds in 2009, I expect demand from China and India especially will regain momentum.

The greatest disconnect I’m seeing is with coking coal to generate electricity. Worldwide demand continues to expand, albeit at a lower rate, while coal prices continue to trade at or near all-time highs.

Granted that production levels taper off in the winter months, but it will only keep prices up until spring rolls around, and that presents an incredible buying opportunity for coal-based income securities.

The fundamentals have held up while the stocks crashed, and that can drive a dedicated investor right to the funny farm. The market has lost all perspective on valuing business assets, giving way to irrational selling by commodity funds [looking] to raise cash to meet redemptions. The reality is that China’s electricity usage is only going to climb with the activation of each of the new coal-fired power plants being brought online weekly.

So I think it’s time to back up the truck and load up with coal-fired stocks, and my favorite is our own Alliance Resource Partners, LP (NYSE: ARLP), which is down to $32 and kicking out a tax yield of [almost 9%—Editor].

But until sanity returns to the stock market, I understand that the “short every rally” mentality currently dominating the investment landscape will continue to make it tough to take new positions.
No one wants to fight the tape, and until Monday’s rally, it has been solidly negative. But three years from now, we will look back with envy at today’s prices for coal stocks like Alliance Resource Partners.

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