With the big coal producers, such as Arch Coal (NYSE: ACI) and Peabody Energy (NYSE: BTU), finding their stock prices near their 52-week lows, it might make investors wonder whether there's something wrong with these companies, the industry, or if it's a buying opportunity. Let's take a look.

IN PICTURES: Eight Ways To Survive A Market Downturn

Stock Prices Underground
Arch Coal stock was trading at $15.35 a share recently, well off its $76.00 52-week high, while Peabody Energy stock was at $30.00, down from its high of $88.69. Both companies' stocks suffered from the drop in coal commodity prices as well as the weakening global demand for coal. Also factored in is the expected toughening of environmental regulations on coal producers and the government policy that is encouraging "green" energy. Still, even through this year of recession, both Arch and Peabody have posted healthy profits while their stocks are selling at roughly seven to eight times earnings.

Cleaning Up Carbon?
The House passed the greenhouse gas bill recently, so the push for cleaner burning fuels, including a "cleaner" coal or switching from coal, is entering a new, more tangible phase. Still, the changes will not be overnight and neither coal as an energy source nor as an industry is about to disappear anytime soon. While some producers such as Massey Energy (NYSE: MEE) are currently feeling the brunt of protests due to its mountaintop mining operations, others such as James River Coal (: JRCC), a smaller company selling at an attractive multiple, continue to flourish. Although Massey faces difficulties, it is still profitable, while James River is regarded by some as an attractive buyout candidate. (For more, see What Does It Mean To Be Green?)

Carbon Transition Long-Term
The potential transition away from coal-based electric power generation will be a matter of years if not decades. The difficulties of "cleaning" coal are such that it will not be an overnight process either. Energy (NYSE: CNX), another thriving coal producer, is one of many major producers involved in the experimental coal plant, which is a Department of Energy project, and shows the coal producers are trying, or have been forced, to climb aboard the cleaner-carbon train. Cleaner energy is not some fad, and energy producers of all kinds, including coal, will have to become more involved as this movement gathers momentum.

What About Coal Stocks?
Even with the environmental changes in line, coal producers have a future. While it might be prudent to scale back the earnings estimates of these companies, going-forward demand for coal should still rebound later in 2009 and 2010. Arch Coal stock, for example, had a five-year run-up to June, 2008, of 560%, and still has great business fundamentals, as does Peabody Energy. Both have tremendous coal reserves and concentrate on underground rather than mountaintop mining, and both have the financial resilience to weather many of the regulatory changes and environmental transitions in the next several years. With coal stocks beaten so far down and selling so cheaply, while the gains may not be on the order of the fabulous five-year run-up for Arch, coal stocks still have life as a long-term investment. (To learn more, read Forget Green Stocks, "Green" Will Do.)

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Stock Analysis

    What Exactly Does Warren Buffett Own?

    Learn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  7. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  8. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  9. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  10. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  4. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  5. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  6. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>

You May Also Like

Trading Center