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You're at a fruit market. But, instead of just being able to buy apples at this fruit market, you can also sell fruit.
You're not a farmer, so you come to the market to buy some apples and you see two fruit stands. Fruit Stand A on the left
is buying and selling apples at 50 cents apiece. However, Fruit Stand B on the right is buying and selling apples at 53 cents
apiece. People are buying and selling apples at these two stands all the time, and the price at a stand could change at any
moment. But, while you're there, apples are 50 cents and 53 cents, respectively.
You're a smart person, and you quickly
realize that you can buy apples from Stand A and then sell them across the street to Stand B and make a 3-cent profit. But
you have to do it now; you can't wait. So you buy all the apples at Stand A and then run to sell them all to Stand B.
Congratulations.
You've committed fruit-stand arbitrage.
Arbitrage is exactly that: the selling of the same item between two different
markets to make a profit off the mathematical differences in price. However, it's not apples that are traded--the goods in
question are usually stocks, currencies and other securities. Arbitrage happens when you get a stock, usually a common one
like General Electric that's traded on multiple markets (Japan, Hong Kong, U.S., etc¿). The stock is usually worth within
fractions of a penny the same on each of those markets. However, there are often some minor variations.
People who
participate in arbitrage take advantage of these variations--and make a ton of money doing it. As seen in the fruit stand
example, you can make a "riskless profit" from buying and selling apples between different markets.
There are some
big hedge funds that make almost all their money off arbitrage. But, despite this simple example, arbitrage is mathematically
complex--and involves a good portion of risk if you don't know what you're doing. You probably won't be able to participate
in arbitrage directly, but you can always invest in a mutual fund that does.
Home / Markets / Industries / Energy
Thursday, May 15, 2008
Zacks Industry Rank Analysis Highlights: Alpha Natural Resources, Arch Coal, Massey Energy Company, Natural Resource Partners and Peabody Energy
Comtex
CHICAGO, May 15, 2008 (BUSINESS WIRE) ----Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week's analysis includes Alpha Natural Resources (NYSE: ANR), Arch Coal (NYSE: ACI), Massey Energy Company (NYSE: MEE), Natural Resource Partners (NYSE: NRP) and Peabody Energy (NYSE: BTU). To see the Zacks Industry Rank and the trend in earnings estimates revisions for more than 200 industry groups, visit http://at.zacks.com/?id=3154.
Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.
The sharp rise in oil, the rally in corn and wheat and the high cost of metals (a nickel is now worth approximately 7.5 cents) have overshadowed another commodity that also continues to appreciate - coal. Coal futures are currently trading at $104, compared to $58 at the start of the year.
As one would assume, the impact of this appreciation, as one might assume, was highly noticeable in the earnings from coal companies. Alpha Natural Resources (NYSE: ANR) said last week that it "achieved the highest quarterly price realization in its history due to rising metallurgical coal exports and price levels".
ANR's first-quarter sales totaled $445.7 million, an increase of 17% from a year prior. The amount of coal tonnage sold rose just 6.9%, however, signifying the impact that higher prices had on revenue growth. Earnings per share reached 39 cents, compared to 13 cents a year ago. (Brokerage analysts had been expecting first-quarter profits of 17 cents per share.)
ANR is not the only company to benefit. Arch Coal (NYSE: ACI), Massey Energy Company (NYSE: MEE), Natural Resource Partners (NYSE: NRP) and Peabody Energy (NYSE: BTU) all realized higher revenues and profits last quarter.
There are several reasons why coal is rising. The overall rally in commodity prices is providing upward momentum. Economic growth in China and India has increased worldwide demand. Higher natural gas prices are keeping coal an economically viable alternative for power. Even the production of steel is playing a role.
Brokerage analysts have significantly raised full-year earnings estimates on all five companies. The magnitude of the revisions suggests a reassessment of the price coal will command throughout the remainder of the year. As is the case with oil, brokerage analysts are realizing that their previous projections were too conservative.
Forecasts for 2009 are also rising. This is important, because it implies that valuations for all four stocks remain within reason despite the sizable returns they have generated for investors this year.
ANR and MEE are Zacks #1 Rank ("strong buy") stocks. ACI, BTU and NRP are Zacks #2 Rank ("buy") stocks. All five companies are classified in Coal (http://at.zacks.com/?id=4571).
The interactive Zacks Industry Rank List allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. See the list at http://at.zacks.com/?id=3208.
About Zacks Industry Rank and the Zacks Rank
Zacks Industry Rank is calculated by averaging the Zacks Rank for all covered companies within a given industry. The Zacks Rank is assigned to approximately 4400 stocks and ranges from #1 ("Strong Buy") to #5 ("Strong Sell"). Both the Zacks Industry Rank and the Zacks Rank are quantitative indicators designed to cover periods of 1-3 months.
Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +32%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have underperformed the S&P 500 by 129% annually (+5 % vs. +12%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.
Zacks "Profit from the Pros" e-mail newsletter offers continuous coverage of the industries and the stocks poised to outperform the market. Subscribe to this free newsletter today by visiting http://at.zacks.com/?id=2564.
Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.
About Zacks
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3:1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit From the Pros by going to http://at.zacks.com/?id=2565.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.
SOURCE: Zacks.com
Zacks.com Contact: Charles Rotblut, CFA Phone: 312-265-9352 Email: pr@zacks.com Visit: www.Zacks.com
Copyright Business Wire 2008
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