Five Reasons why Coal Stocks could Burn Brighter

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While 2012 has been a bleak year for companies operating in the coal sector, there are five recent developments that should lead to a brighter future for Cliff Natural Resources (NYSE: CLF), BHP Billiton (NYSE: BHP), Peabody Energy (NYSE: BTU) and Yanzhou Coal Mining Company (NYSE: YZC), and others in the industry.

The first, and most significant, involves the biggest consumer of coal in the world, China.  Beijing announced in early September a massive $156 billion stimulus package that will focus on infrastructure projects.  This will particularly benefit Yanzhou Coal Mining Company, which is based in China, and BHP Billiton, which does a great deal of business with the People's Republic.  As a result of the Chinese stimulus plan, Market Vectors Coal (NYSE: KOL), the exchange traded fund for the industry, and coal industry stocks jumped:


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BHP data by YCharts

Japan also this month announced that it was ending its reliance on nuclear power.  That will increase the demand for coal from the island nation.  At present, Japan is the second largest importer of coal in the world. Coal imports should increase substantially, particularly if natural gas prices continue to rebound.

Oil has also risen as a result of Quantitative Easing 3.  This is from the US Dollar weakening in value due to the Federal Reserve inflating its balance sheet to buy hundreds of billions of securities.  As the US Dollar becomes less attractive, investors pile into commodities such as oil, gold and silver.  The more expensive oil becomes, the more attractive coal becomes as an energy source. 

While not rising as much as oil, coal too increases in value as a result of quantitative easing efforts around the world.  The central banks of United States, Europe and Japan have all initiated economic stimulus measures that result in fiat currencies being less appealing to investors.  The chart below shows how Market Vectors Coal and United States Oil, the exchange traded fund for oil, rose as PowerShares DB US Dollar, the exchange traded fund for The Greenback, fell during the period of Quantitative Easing 2, which was announced in August 2010 and finished in June 2011.


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KOL data by YCharts

Coal stocks that provide dividend income will also be more attractive as Federal Reserve Chairman Ben Bernanke has pledged to maintain a low interest rate environment well into 2015.  That will place a premium on stocks with healthy dividend yields from income-seeking investors.  The current dividend yield on average is around 2% for a member of the Standard & Poor's 500 Index.  For Cliff Natural Resources, the dividend yield is 6.13%.  Yanzhou Coal Mining Company has a dividend yield of 5.97%.  At present, BHP Billiton has a dividend yield of 3.23%.   The shareholders of Peabody Energy receive dividend income at the rate of 1.48%.

Even before these five factors came into play, each of these stocks was very appealing to growth investors. The price-to-earnings growth ratio (PEG) is considered to be one of the most important financial indicators by investing legend Peter Lynch.  A PEG of 1 is considered to be adequate.  The PEG for each is well below 1, which is very bullish.  As an example, the PEG for Peabody Energy is just 0.25, which is stunningly low.

Year to date, Market Vectors Coal is off by 26.23%.  From this, the declining prices in coal stocks have resulted in very attractive valuations.  Yanzhou Coal Mining Company is selling with a price-to-sales ratio of 0.85.  That means that every dollar in sales is priced at a 15% discount in the stock.   With a price-to-book ratio of 0.92, the assets of Cliff Natural Resources are at almost a 10% discount in the share price.  For a stock with a 6.13% dividend yield, that is very alluring.  The bullish PEGs evince that these stocks are not value traps!

For growth, value and income investors, Cliff Natural Resources, Peabody Energy, BHP Billiton and Yanzhou Coal Mining Company have much to offer.  The five recent developments further the appeal of each to all investors.   The appeal of these stocks should only increase as economic growth rebounds in China and the demand for coal grows in Japan.  The wait is well worth the time due to the dividend yield from each, which is becoming more prized by those investors seeking income to enhance the total return of an equity.



Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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