Local Stocks Lag in a Strong Month for the Market

The Scout Partners Index of Western Colorado Stocks rose in April, gaining 3.4% versus a 4.4% monthly gain for the widely followed S&P 500 stock index (total return including dividends). The 25 stock index focuses on large companies whose operations have a significant impact in Western Colorado. It includes major Mesa County employers such as Wal-Mart, Halliburton, Kroger (City Markets), StarTek, CRH (United Companies), and the Union Pacific Railroad. Though the energy sector had a strong month overall, local energy service stocks generally lagged the market which contributed to the overall index underperforming the broad market.


Rising 17.5% in the month, Arch Coal (ACI) ended the month at $36.07 and was the strongest performer among local stocks. “Arch Coal raised its dividend and announced earnings that beat Street expectations,” said Doug May, President of Scout Partners, LLC. “but most of the stock’s run-up was early in the month, ahead of the announcement,” May said. May attributed the strong stock price to more talk about a new coal-to-liquids conversion process where the company is supplying coal to Houston-based DKRW. “DKRW just signed a contract to sell the synthetic gas to Sinclair Oil where it is used to produce ultra-low sulfur diesel fuel,” May observed. According to company officials, the process is economical as long as the price of oil remains above $40 per barrel. In mid-April, when the stock was running up, oil prices spiked up to $66 and closed the month at $65.71. Earlier in the month, the CEO of Arch Coal hinted that his company might be looking to acquire other coal mining assets after a judge revoked four permits allowing Massey Energy to mine coal in Central Appalachia, an obstacle that could make mining more difficult, raise coal prices, and boost the value of today’s reserves.

Mesa Air Group (MESA) was the worst performer in the index, returning -10.36% during the month of April including a 1.89% decline during Monday’s market decline. So far in 2007, the stock has declined 20%. “The analysts just hate the stock,” May said. “The Prudential analyst cut his target price from $16 to $9, and after the stock declines from to $8 a Credit Lyonnais analyst downgraded the stock from Add to Neutral and cuts the target price even further, to $7.20.” Six months ago, Mesa Air’s estimated 2007 earnings were $1.24 but estimates have since fallen to less than $1.00 per share.

Scout Partners equal weighted Index of Western Colorado Stocks is comprised of 25 stocks that hope to reflect, to some degree, business conditions inWestern Colorado. Reflecting the local economy, the index has a large (over 30%) concentration in the energy sector, which tends to drive index performance. The next largest sector concentration is in industrial stocks, which comprise over 20% of the portfolio. Local stocks are up 6.6% for the year while the overall market has returned +5.1% over the same time period.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

Go to Investment Main Page