Remember how the ridiculous price of oil pushed coal stocks into favor in the first part of 2008? They were still going strong until the middle of last year. It's kind of funny how things can get upended, though, when the economy is in shambles and stocks are careening. The S&P 1500 Coal Stock Index sank 85% between the June 2008 high and the November 2008 low. Ouch!

As I suggested in a recent article, however, the cyclical nature of the economy appears to be wringing out the last of the major economic problems and is ready to foster growth again. (For more, check out Aluminum, From Rags To Riches.)

So what? Coal stocks that were excessively beaten up during the bear market may dole out excessive rebound gains during a new bull market. Here's the latest reality check and why I'm bullish on coal again.

Falling In Love All Over Again
Though it remains to be seen if the upgrade will sustain coal stocks' newly found bullishness, the recent Goldman Sachs upgrade of the coal industry's stocks certainly put them back on the radar. Yanzhou Coal Mining (NYSE:YZC), Peabody Energy (NYSE:BTU), Arch Coal (NYSE:ACI) and many others jumped following the May 4 announcement.

But was it a deserved boost? If you're looking at historical results, possibly.
For instance, Peabody's recent quarterly SEC filing confirmed stronger Q1 sales than it saw in the same quarter last year, rising from $1.18 billion to $1.28 billion. Profits were up, too, from $57 million to $170 million. Earnings were atypically strong for the company's Q1, even without the one-time bump from discontinued operations.

James River Coal (Nasdaq:JRCC) also knocked one out of the park during the Q1. Compared to a loss per share of 78 cents taken in Q1 2008, earnings of any size this time around would have been just fine. The company topped estimates of 81 cents a share by raking in $1.03 per share on a revenue increase of 39 percent.

Where Did The Increase Come From?
Not that every coal mining operation posted the same kinds of increases, but Alpha Natural Resources (NYSE:ANR), James River and Massey Energy (NYSE:MEE) all reported higher selling prices for their coal because they had contracted those prices months ago. In other words, the average price for coal industrywide may have been artificially inflated during the last few months.

Therein lies the tricky part about investing in coal. For many of these companies, this year's stronger prices were largely determined by sales contracts signed in 2008. Likewise, next year's top line will largely be determined by prices set this year, at least for some of the forward-thinking companies. (Find out how to invest and protect your investments in this slippery sector; see Peak Oil: What To Do When The Wells Run Dry.)

Great - a mixed message. So, can we or can we not expect a repeat of those highly fortunate agreements, or at least an improvement in spot prices for the companies that don't forward-price their goods? If coal and coke customers are seeing the same thing Goldman sees, I think the answer is yes.

Goldman Foresees Turning Black Into Green
The Goldman upgrade for the industry was ultimately rooted in China. The investment banking and research firm looks for 8.9% growth in China's GDP this year and anticipates the rate going up double digits in 2010. That's an indirect way of calling an economic bottom, whether Goldman meant to or not.

What does China's GDP have to do with U.S. coal companies? Not a lot directly, but quite a bit indirectly. China burns coal like crazy. The country's consumption of it exceeds the combined consumption of the U.S, Europe and Japan. Eighty percent of its power comes from coal. Connect the dots here. If China starts burning even more of it to keep up with an economic recovery as Goldman implied, global coke and coal supplies will dip and prices should move up with demand, thus simultaneously solving both the price and demand problems.

Won't Every Industry Benefit From A Global Recovery?
Yes, but here's the key and the point: I don't see too many industries' stocks still down 70% from their 2008 highs, and in an industry with a legitimate shot at seeing better days real soon. A large number of coal stocks have been doing well despite the recession, and they could do even better with a modest improvement in the economy. Yet they've gone mostly unnoticed. That's the value seeker's trifecta - finding the right combination of undiscovered, underestimated and undervalued names. (The economy has a large impact on the market. Know how to interpret the most important reports; see Economic Indicators: Overview.)

Bottom Line
I think you can add coal stocks to your list of long-haul recovery candidates, which already included aluminum stocks. Just FYI, I have a couple more obscure groups like coal and aluminum that look poised to be big, long-term winners following their overzealous 2008 decimation. Stay tuned.

Filed Under: ,
Tickers in this Article: BTU, ACI, YZC, JRCC, MEE, ANR

comments powered by Disqus

Trading Center