3 Stocks Set to Lose Yesterday's Gains

With the Dow Jones Industrial Average tacking lower yesterday over the start of earnings season despite McDonald's (NYSE: MCD  ) eking out a gain after saying it would make iPads available for customer use at some restaurants, some companies did even better and jumped by double-digit percentages.

Company

% Gain

Radio Shack (NYSE: RSH  )

12%

James River Coal (Nasdaq: JRCC  )

10.1%

Alpha Natural Resources (NYSE: ANR  )

7.4%

Resist the urge to high-five everyone in the cubicles near to you, however. Smart investors won't celebrate until they know why their stock surged, because without a fundamental basis for the bounce, these stocks could just as quickly make the return trip down.

Short circuiting
At some point, so long as there is some viable business activity, a stock falls so far that it's shares can no longer be ignored. Radio Shack seems to be benefiting from just such a scenario as it exhibited signs of life after a Bank of America (NYSE: BAC  ) analyst suggested its stock had been severely discounted to the point where it now looked attractive.

Noting the CEO had been ousted; dividends, buybacks, and guidance had been suspended; and the stock was kicked out of the S&P 500 index, Radio Shack still had some serious cash to fall back on. The chance for new leadership to make its mark suggested it was now the time to buy. Of course, the analyst's price target of $2.50 was only 20% higher than where it was trading before the recommendation.

Unfortunately, I still see The Shack in the same position as its rival Best Buy (NYSE: BBY  ) as both are being challenged by Amazon's (Nasdaq: AMZN  ) Internet-based business model. With both also scurrying to salvage their operations by attacking the mobile phone market there's going to be ferocious competition. Margins will continue to be squeezed.

While the analyst is hopeful a new leader will be successful in turning Radio Shack around, that's just wishful thinking. There's been no game plan laid out, no road map detailed to make an educated guess that the path they'll be taking is the right one. Heck, they don't even have the new CEO named yet! But let me know in the comments box below if you agree any change in direction for Radio Shack has to be better than the one they're heading in now.

The coming mine collapse
Despite a bearish note from Goldman Sachs (NYSE: GS  ) on Arch Coal (NYSE: ACI  ) over liquidity concerns, the coal sector itself was leaping higher yesterday with the Motley Fool CAPS Coal stocks up almost 1.6% led by James River and Alpha Natural. Even Arch defied the downgrade and rose 3.3%.

The hope is that depressed coal prices, coupled with cooler temperatures and a barely perceptible economic recovery, will overcome the advantages offered by natural gas. Good luck with that. As I pointed out the other day, some of the riskiest coal plays have a lot of debt coming due soon and unless there's a really robust recovery in the sector many players will be challenged in meeting their obligations. Arch Coal's debt maturities begin as early as next year and Alpha's starts the year after. Patriot Coal won't be the last miner we see going bankrupt unfortunately.

Now Alpha Natural Resources is one coal play I actually like, and the recent political talk suggests some of the stronger names in the space will still come out standing tall. However, I think James River seems more suspect. I've previously rated Alpha to outperform the broad indexes and just rated James River Coal to underperform because of their respective financial situations.

By making those CAPScalls I hold myself accountable for the opinions I express here so while my May rating on Alpha has yet to pay off -- the stock has fallen 44% compared to the S&P 500 rising more than 7% -- I continue to believe the market will soon understand the differences between the various miners.

Let me know in the comments section below if you think these miners can dig their way out of the hole they find themselves in.

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Rich Duprey has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Bank of America, Best Buy, McDonald's, and RadioShack and is short RadioShack. Motley Fool newsletter services recommend Amazon.com, Goldman Sachs Group, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 10, 2012, at 6:27 PM, randysandy wrote:

    Hey Rich: when is james river's debt due?

  • Report this Comment On October 10, 2012, at 6:52 PM, TMFCop wrote:

    randysandy,

    JRCC's debt doesn't actually mature until 2015, but it's a highly leveraged miner that's likely to be burning cash. Standard & Poor's has suggested that its small size and high operating costs, coupled with the capital-intensive nature of its operations makes it an exceptionally risky best at this point. It was the reason for the credit rating downgrades earlier this summer, though the most concern was raised on the debt maturing in 2019.

    Rich

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