Coal miner Peabody: A fast-rising phoenix - from bankruptcy to top value manager's stock pick

The world was first introduced to the term “cigar butt” shares in what Warren Buffett regards as the best investment book ever written. Published in 1949, Benjamin Graham’s masterpiece is called The Intelligent Investor. And Buffett reckons it provided the skeleton around which all his other investment knowledge was built. Graham, who changed his surname from Grossbaum in recognition of those anti-Semitic times, likens some shares to a mostly smoked cigar. They are shares in companies whose circumstances have changed significantly for the worse so have been shunned by most investors. But often this neglect can push the unloved orphan’s share price below what is realistic, providing an opportunity for the smart analyst to see value where others don’t. Hence the analogy with a cigar butt that still has a couple of good puffs left. Peabody Energy, the world’s largest private sector coal miner, was one of many coal companies that hit the wall after the mineral’s price plunge. Shareholders in Peabody were wiped out, but thanks to $800m in financing from banks led by Citigroup, the company’s coal mines continued producing running. Last April, a year after opting for Chapter 11 bankruptcy protection, a rehabilitated Peabody re-emerged onto the New York Stock Exchange. While off the market it raised fresh capital at $25 a share. Those who jumped into the stock at that level when it relisted a year ago have enjoyed a 64% paper profit. And judging by the Orbis stock picker, that’s only the start. While its track record and coal’s poor long-term prospects will ensure many will keep seeing Peabody as a cigar butt, shareholders may well be smoking away luxuriously for many years to come.