A Look at Coal Stocks: Past, Present, and Future

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The market rallied on Monday as fiscal cliff fears diminished. And although most stocks traded higher, there was one industry that separated itself due to some encouraging data: coal. Now, some believe the beat down industry can continue to rally into 2013.

Coal Performance: Past, Present, and Future

The coal industry has lost 42.28% of its value in the last five years; as depressing natural gas prices, a weakening Chinese economy, and a lack of political support have been the near death of coal. In a year when the S&P rallied 13% coal stocks have continued to fall nearly 22% as these fears remain. However, in the last few months there have been some signs that coal could be on the rise: Take a look at some of the industry’s elite, and their recent trends.

Company

Ticker

2012 Performance

Three Month Performance

12/31/2012 Performance

Peabody Energy

(NYSE: BTU)

(20%)

19%

4.93%

Cliffs Natural Resources

(NYSE: CLF)

(38%)

(1.4%)

8.40%

Arch Coal

(NYSE: ACI)

(50%)

15%

4.27%

Alpha Natural

(NYSE: ANR)

(52%)

48%

5.07%

Walter Energy

(NYSE: WLT)

(40%)

10%

6.09%

 

  • A recent management shakeup might suggest a change in direction at Peabody Energy. The company has already guided that Q1 will be weaker than previously expected. However, the company also said that it expects to see increased U.S. gas-to-coal switching in 2013; and that their overall market looks to improve in 2013.
  • Cliffs Natural Resources has seen fundamental declines, but is also priced for a worst case scenario. As of now the company is expected to see a 50% decline in earnings. However, the company looks poised to benefit from the rise in iron ore prices; which is higher by about $50 per ton in Q4 of 2012. This is one of the company’s largest contributors to profit, and is something to monitor.
  • Arch Coal has declining inventories and is operating in a more competitive pricing environment, which should bode well for the company. Much like Cliffs Natural Resources, Arch Coal has seen significant fundamental declines, but is well-positioned in 2013 to capitalize on any increases in global demand.
  • Alpha Natural Resources is a similar story to the others in the space, but has seen the greatest three month performance. The stock has seemingly become the favorite of investors looking to capitalize on a potential coal rush. Yet despite its gains, the stock continues to trade with a price/sales of 0.28, which is an industry worst. Therefore, it might still be undervalued despite recent gains.
  • Walter Energy has been at the epicenter of acquisition rumors for the last couple months. Reportedly, there are several big names interested in the company, including BHP Billiton. The company is expected to post a profit in 2013 and is seeing moderate top line loss compared to the others. Therefore, the level of interest from potential acquirers combined with the potential for a recovering market, might make Walter an attractive “buy”.

A Look Ahead for Coal

When you look at the industry’s elite coal stocks above, you should notice three things: 1) All have traded with large loss in 2012 2) but all have recovered mightily in the final three months of 2012 to find some stability 3) and finally all significantly outperformed the market on the final day of the year.

So how should investors play coal heading into 2013? To answer that question I’s like to refer you back to 2011 and the financial sector. In the final six months of 2011 the sector, and more specifically the large banks, led the market in loss, 26%. However, towards the end of 2011 and throughout 2012 this sector led the market in performance as funds rebalanced and acquired undervalued companies.

Banks in 2011 fell because of speculation and some fundamental concerns, but in 2012 thanks to a rise in the housing market, and a belief of a rising housing market, the stocks were quick to trade higher. Therefore, if coal trades higher it would have to be because of a catalyst, and that catalyst might be China, among others.

On December 31, China’s HSBC PMI expanded at its fastest rate in 19 months, suggesting a possible re-emergence in coal. The strong manufacturing data supports the thesis of a rebound in China, when combined with earlier reports of rising ore prices. Furthermore, natural gas prices have continued to rally, therefore adding to the belief that coal demand could rise in 2013.

Looking ahead to 2013, I don’t think coal is an industry where you can buy several companies in the space, sit back and watch it grow. I think like most investments it comes down to individual companies, and the positioning of those companies in the market. Therefore, I suggest performing your own due diligence and combining the market outlook/information that I’ve discussed today. Personally, I think there will be several coal stocks to trade considerably higher in 2013, but which one requires more research.


BrianNichols has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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