What: Shares of Peabody Energy Corporation (NYSE:BTU) jumped more than 15% on Wednesday. The surprising catalyst fueling the surge was the fact that the stock was downgraded by an analyst from neutral to overweight. That said, investors took comfort in the fact that the downgrade wasn't all the way to sell.
So what: In the downgrade the analyst clearly didn't throw in the towel, but instead simply said that the firm was now "uncomfortable" with an overweight rating on Peabody. Furthermore, the analyst noted that with 36% of shares sold short, there's a potential for a short squeeze leading to a much higher stock price, which is what appears to be the catalyst behind today's surge. While this isn't a ringing endorsement, it does suggest that the analyst has some hope that Peabody will someday recover without the aid of bankruptcy.
That said, there's not much reason to be bullish on Peabody at the moment. The coal market continues to weaken, with a recent data point noting that coal rail loadings are down 7% to 8% in the key Powder River Basin, Northern Appalachia, and Illinois Basin, while loadings are down 15% in Central Appalachia. That suggests demand remains weak, which will put more pressure on coal prices.
Now what: With more than a third of its float sold short, Peabody Energy's stock price will likely remain hyper-volatile. Any good news could send shares surging, while bad news will likely lead to a double-digit dip. Suffice it to say, investors should expect a very wild ride, which could end badly, as it's not out of the question that Peabody Energy could join several of its coal producing peers in bankruptcy.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.