We Said We'd Grab This Stock at $6 — And Here We Are
Meet the "Special-Situation Seven" ...
In our July 24 story “Watch List: Five Stocks … in Five Minutes,” I dubbed Hallador Energy Co. HNRG 0.00%↑ as a “Utility in the Making.”
On the day before we shared that report, shares of Hallador closed at $8.41. And the stock traded as high as $9.20 just days before. That’s why I said to “watch” Hallador — and to consider a “foundational” purchase — should the stock drop back down to around $6.
Well folks, it’s there.
The stock closed last Friday at $5.74 and is still under $6.
The share price — and my view of Hallador as a “special-situation” stock — has really stoked my interest.
I’ll give you the full rundown here today — including the “triggers” that could make the stock go … and the best way to buy it.
(You can even check out this “watch list” report below … to get some other nifty ideas.)
The ”Special-Situation Seven”
The Terre Haute, Ind.-based Hallador draws its name from the Spanish term for “one who leads the way.”
And that’s what it’s hoping to do in the new energy niche it’s chosen.
Hallador has been an energy-market player since 1951. It began as an oil-and-gas explorer, evolved into a coal firm and is undergoing another makeover — this time into renewables and actual power production.
Indeed, that’s one of the “baker’s half dozen” (seven) intriguing factors that make Hallador a “special-situation” stock in my book.
This “Special-Situation Seven” consists of:
It’s misunderstood — because it’s changing its business model.
Dealmaking could accelerate that transformation.
The shift away from “carbon” fuels won’t be as quick or as easy as most folks think.
We have the chance to do this before retail investors catch on.
It’ll be aided in the near term by falling interest rates and in the long term by rising energy demand.
There’s a shot at a “Bitcoin (BTC) Kicker” — a “trigger” that dovetails with our “what-comes-next” view of that bellwether cryptocurrency.
And Hallador “insiders” seem to like the company at about this share-price level.
Let’s break a few of these down in greater detail …
We Like the “Long Game”
The first of my ‘Special Situation Seven” investment points is a strong one — that the company is not well-understood thanks to its latest business-model shift.
The old maxim “with change comes opportunity” definitely holds true here: Change also creates confusion — a synonym for “misunderstanding” — and an opportunity for savvy (“informed”) investors.
But it’s the “long game” we’re playing here.
Small-cap specialist Cove Street Capital sees it as I do:
“We don’t pretend that the coal business and the coal power generation business is not cyclical, but [the precipitous, near-term drop in coal demand] was past the north-end of our expectations,” Cove Street wrote in a recent report. “A warm winter and low gas prices were the simple double whammy. We see the opposite this summer. Underneath short-term movement, the U.S. remains in a dance between the desire for Green and the necessity of consistently keeping the lights on. These assets get more valuable every day in our opinion."
Indeed, on that last point, the U.S. Energy Information Administration (EIA) says global electricity demand could surge by 33% to 75% by 2050, when as much as two-thirds of the world’s electricity production could come from nuclear and renewables. Both the “stickiness” of carbon fuels (check out our report on coal here) and the shift toward renewables will benefit Hallador.
In the near term, the coal market (and coal prices) will whipsaw investors — although, longer term, I like coal very much.
(We’ve detailed Natural Resource Partners NRP 0.00%↑ — a special-situation metallurgical-coal play — a number of times here. And our favorite “Accumulate” coal stock is in our Model Portfolio — for our SPC Premium subscribers.)
Hallador is a “thermal-coal” player — meaning coal for power and heat. And it’s a “utility in the making” — meaning it uses its own “stuff.”
In MBA circles (I have one … but I simplify what I learn by translating it into “real-people terms”), this is what’s known as a “vertically-integrated” energy producer.
And it’s making moves to achieve a razor-sharpness.
In February, the company streamlined its Sunrise Coal Division to slash costs and boost margins. It cut production at its higher-cost Freelandville and Prosperity Mines, throttled its 2024 capital outlays by $10 million and refocused its energy on its lower-cost properties.
Here’s where it gets interesting.
My good friend Matt Warder — publisher of The Coal Trader here on Substack and perhaps the most-prominent independent coal analyst in the market today — has talked often about the need for a “reasonable energy transition.”
Enter Hallador …
The company’s Hallador Power Co. unit runs the Merom Generating Station, a two-unit, coal-fired power plant that’s rated at 1,080 megawatts. The Sullivan County, Ind.-situated plant has been running since 1982 and will sell electricity to Hoosier Energy customers — and back into the Midwest power grid.
“A strong America requires a reliable energy grid,” Hallador says. “Power generating is a natural next step for our evolving company [and for America’s shift to] renewable energy solutions. Hallador Power is the pragmatic approach to that transition … Hallador Energy believes that there is no one solution to our energy needs but takes a practical, reliable approach to ensure America’s economy is plugged in and working at full power.”
Hallador’s “pragmatic” transition … and Matt’s “reasonable” transition: Two ways of saying the same thing.
And they’re both correct.
During that transition — and over the long haul — there's a huge opportunity here.
AI and Crypto “Kickers”
There are niche opportunities, too.
Here in the Artificial Intelligence (AI) Era, the explosive demand for data centers will amp up the need for power (I know … I know … a bad “power pun”). And the appetite for power, land, water and workers could lead to new data center projects being sprinkled about the country — perhaps close to existing power plants, or even prompting custom “mini-plants” to be built.
Another niche opportunity is with Bitcoin “miners.” U.S. coal producer Alliance Resource Partners LP ARLP 0.00%↑ has diversified into mining the bellwether cryptocurrency as its roster of coal customers shrinks.
The Tulsa-based Alliance originally did this as a corporate “pilot project” — one that would monetize the excess power load from its River View Mine in Kentucky into some form of cash. It reported a cache of $30.3 million in Bitcoin at the end of the first quarter — up from $9.6 million at the end of last year.
Hallador and AboutBit, a Kentucky-based private venture, are planning a crypto-mining venture adjacent to the Meron power plant.
Bitcoin is a bit adrift right now. But there’s a rebound in the offing — which we just detailed it in a special report with my Platinum-Rolodex crypto expert David Zeiler. So that, too, could provide a revenue stream to Hallador.
One last point (meaning we’ll have covered all but one of our “Special-Situation Seven”): In this environment, if Hallador gets up and running, it could easily end up as a buyout target.
Signal From an "Insider”
One thing my co-author and I detailed in our 1998 book Contrarian Investing was the allure of insider buying on a beaten-down stock.
We have that here.
Back in March, independent director Charles Ray Wesley bought 46,100 shares of Hallador on the open market — at a range of $5.21 to $5.25 — spending $240,100 to do so. That left him with 245,570 shares at the end of that reporting period — a 23% increase in his holdings.
This is significant for a couple of reasons.
First, open-market buying is a bullish signal. Corporate insiders get shares in a lot of ways these days — via options, through bonuses, and even with tracking rights. So when they spend their own money to buy shares in the open market, that’s often significant.
After all, who can better see the all-important “what comes next” for a company?
And here the price is also worth noting: About $5.25 a share — or close to the $6 buy level I identified.
As part of a push to reduce overall debt, Hallador recently cleaned up its balance sheet by converting some convertible debt to stock. It posted a first-quarter loss of $1.7 million — and conceded that the 816,000 megawatt-hours of power it generated fell short of its 1.5 million target — but also noted that revenue from its electricity operations surpassed those from coal for the first time.
With a market value of about $254 million, this is definitely a small-cap play. Indeed, with the pullback I’ve talked about here today, Hallador has performed the “micro-cap limbo” — dancing under the $300 million microcap/nanocap threshold — so I’m going to call it a microcap here.
Your Buying “Blueprint”
Make no mistake: This is a super-high-risk stock, one that demands the following special-situation strategy — and that afore-mentioned longish time horizon.
If you don’t have the patience and the stomach to take a volatile ride that’ll take several years to pay off, that’s totally okay — another opportunity that fits with your emotional makeup and personal strategy always comes along.
When we talk about a “Foundational Stake,” I mean exactly that — an “Accumulate” approach where you:
Buy a starting position here.
Add to it either as you get more cash, on a scheduled basis (dollar-cost averaging) … OR;
Buy more on pullbacks that are due to broader market declines and not because of drastic shifts in the Hallador narrative — or miscues by the company itself.
Where can the stock go from here?
Modeling “under-the-radar” stocks like this one can be tough — especially when companies are dancing along inflection points like Hallador’s.
So let’s look for some guidance.
In late May, B. Riley Analyst Lucas Pipes boosted the stock from a “Neutral” to a “Buy” and raised his target price from $8 to $9 a share. We don’t typically put much stock in Wall Street ratings. But this one tracks a bit: Hallador was in the $9 range just a month ago.
And for the long term, there’s even more potential.
I’ll keep watching this one for you.
See you next time;
P.S. There’s an energy play I like even more than Hallador … a stock I believe can double from here — and then, with the company’s cash flow, potentially 10x FROM THERE. I like it so much that I added it to our Model Portfolio for our SPC Premium folks and assembled a full dossier on it …. and my other top picks.