Whitehaven Coal Ltd shares are up 800%: Is it too late to buy?

Credit: Oatsy

Shares of Whitehaven Coal Ltd (ASX: WHC) have risen another 1% today. That mightn’t be as spectacular as the 6.7% gain recorded during Wednesday’s session, but it is exciting when you zoom out a little further.

Whitehaven Coal was broadly written off as a dud stock by analysts and investors earlier this year. The idea that coal was dead and renewable energy would continue to grow in popularity saw Whitehaven’s shares plunge to a low of 35.5 cents in February this year as coal prices continued to decline.

The shares have skyrocketed since then. Today’s 1% gain has the shares trading for $3.20, which represents a stunning 801% return. Not bad for a dud stock.

Source: Google Finance

Source: Google Finance

The stunning turnaround experienced by shares of Whitehaven Coal was mostly sparked by a change in regulation in China which, in turn, led to strong rebounds in the prices of both metallurgical and thermal coal.

The policy itself limited Chinese coalminers to working 276 days per year, down from 330 days previously – a reduction of more than 16%. The intention was to tackle a chronic supply glut that had weighed on prices.

Whitehaven Coal has been a clear winner from the trend. New Hope Corporation Limited (ASX: NHC) has also been a beneficiary, as has diversified miner BHP Billiton Limited (ASX: BHP), although their shares have risen a more muted (but still very respectable) 30% and 45% over the same duration, respectively.

The idea of a nine-bagger (when an investment rises 800% or more) over the space of eight short months is certainly appealing for investors. To give that figure some context, it would be enough to turn a $10,000 investment into $90,000.

The problem, however, is China has now relaxed those production limits which could weigh on coal prices in the future. It is unclear when that would happen, or by how much, but it could easily impact companies such as Whitehaven Coal who rely on a higher price for earnings stability or growth.

Whitehaven Coal’s shares have made regular appearances among the market’s top performing shares in the months since February, but it would be fair to argue that much of the upside is now priced into the shares. Given the potential downside risk associated with falling coal prices, investors do need to weigh up the potential benefits and risks of an investment in Whitehaven Coal today. Personally, I’ll be steering clear.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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