The Market Vectors Coal ETF (NYSE:KOL) was one of the top performing ETFs in 2009. It is home to many of the biggest U.S. coal producers and several large international players as well. KOL. And that top spot isn't just in comparison to energy-related ETFs. KOL was one of the top 10 performers across all ETFs. However, that trend hasn't carried over into 2010 as KOL is down more than 5%. In fact, until last week, KOL had been down as much 13% on a year-to-date basis.

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For retail investors, the outlook for the coal sector is likely to be viewed as downright confusing at this point. One reason that KOL took such a beating earlier this month and in late January was the fourth-quarter earnings reports delivered by many coal producers were less than rosy. It should be acknowledged that most of these companies offered up decent outlooks for 2010 fueled by rising demand from China and India, yet the stocks were still punished.

Adding to the confusion, analyst reports on the sector offer little in the way of consistency. For example, on January 21, Citigroup cut its ratings on Arch Coal (NYSE:ACI), Consol Energy (NYSE:CNX), Massey Energy (NYSE:MEE) and Patriot Coal (NYSE:PCX). The next day, Goldman Sachs reiterated its '"attractive'" rating on the sector, but downgraded Massey while upgrading Consol and boosting the latter's price target. Talk about confusing!

Let's take a look at a few coal stocks on a individual basis to see if we clear things up.

An "A" For Alpha Natural
Virginia-based Alpha Natural Resources (NYSE:ANR) was one of the few members of this sector to deliver a fourth-quarter earnings report that was actually met with a warm reception. Excluding one-time items, the company earned 51 cents a share, handily beating analyst estimates of 45 cents a share. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Beyond that, Alpha Natural said thermal coal inventories have fallen by 30 million tons since November - a significant fact because it was rising thermal coal stocks that led many analysts to question the rally in the coal sector to begin with. Thermal coal is used by electric utilities throughout the U.S. to deliver power to businesses and residences.

Perhaps more important was Alpha Natural's robust outlook for metallurgical coal shipments this year. The company expects to ship 11 to 13 million tons of metallurgical coal this year, up from a previous forecast of 10 to 12 million tons. Metallurgical coal is a key ingredient in the production of steel, and most of that met coal is going to China and India.

The stock is on the highly regarded Goldman Sachs "Conviction Buy List" and Goldman's preferred name in the sector, but at the same time, Credit Suisse says Alpha Natural offers the least favorable upside/downside scenario of the coal equities the firm tracks.

Consistency On Massey Energy
Massey Energy looks like one of the few names in the coal sector that analysts are agreeing on and the news isn't good. As mentioned above, Citigroup and Goldman both downgraded the stock within a day of each other and JPMorgan joined the party last week, paring its rating on Massey to "neutral" from "overweight."

JPMorgan analyst John Bridges acknowledged that Massey should trade at a premium to its rivals and the company should perform well in 2010, but that most of the optimism surrounding the bullish 2010 case for Massey is already priced into the shares. He has a $43 price target on the stock. That's less than $1 from where the stock trades as of this writing.

Massey shares look fairly valued here at more than 35 times their trailing earnings and nearly three times book value.

A China Play
Well, nearly every coal stock you could think of is a play on China, but Yanzhou Coal Mining (NYSE:YZC) is actually based there. Yanzhou is a top 10 holding in KOL and as such, the shares have been on a wild ride this year. At one point, the stock was up nearly 16%, before shedding nearly 30%. Currently, the stock is down "just" 5% on a year-to-date basis, so this is a volatile name to say the least.

The company is China's fourth-largest coal producer and has become a player on the global stage through its $3.54 billion acquisition of Australia's Felix Resources. Yanzhou's M&A plans are not likely to end there as many market observers expect Chinese energy firms to be actively shopping for takeover candidates this year in an effort to reduce their country's dependence on foreign energy sources.

The recent pullback in Yanzhou shares could represent a nice buying opportunity for a company with solid longer-term prospects; remember, this is not a mega-cap company by any stretch. That said, keep in mind that the shares feature a beta of 2.6, meaning the stock is extremely sensitive to the broader market's whims.

A Muddled Picture
It is certainly hard to get any clarity on what the near-to-medium-term outlook is for coal stocks and stock picking on an individual basis is made tougher by the conflicting analyst reports. If you can deal with the volatility, KOL might be your best option and for investors with a longer-term outlook, Yanzhou looks like a sensible choice. (For more information on coal stocks, see Forget Green Stocks, "Green" Will Do.)

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Tickers in this Article: KOL, ACI, PCX, MEE, CNX, ANR, YZC

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