Coal has gotten very cold very quickly. One of the hottest commodities only a year ago, it feels as though the bottom has fallen out of many of these stocks. If coal follows the common commodity pattern, the overshoot at the top of the market will be coupled by a dive and investors will have the opportunity to pick up some real bargains. Investors thinking that today is the day to buy, should remember that another global recession presents a major downside, even from today's prices, but there are many stocks approaching interesting price levels.

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What's Gone Wrong?
A lot of the melt-up in coal was fueled by the economic recovery, as better business conditions promised better demand, both for thermal coal, used to produce electricity, and metallurgical, or met coal, used to produce steel. Since the spring of this year, though, investors have begun to not only accept the end of the recovery, but fear a potential slip back into recession. That has led to a great deal more caution at steel companies and lower orders at utilities. (For related reading, see Industries That Thrive On Recession.)

To that end, the market has been spooked recently by disappointing shipment guidance from the likes of Alpha Natural Resources (NYSE:ANR) and Walter Energy (NYSE:WLT). Though Canadian railroad Canadian National (NYSE:CNI) recently made some mildly encouraging comments about its coal traffic, the reality is that the parlous state of economies in North America, Europe, and Asia has investors very much on edge.

Names to Watch
Nevertheless, all is not lost for coal. The disaster in Japan earlier this year has put the expansion of nuclear power on ice, so coal is here to stay for a while longer, both as a source of electricity and a critical component of steel. Moreover, major coal companies have been on a consolidation binge, particularly for met coal, and are actively working to expand their global footprint. At the same time, the migration of most U.S. coal companies away from Appalachia and towards Powder River Basin deposits, which are as much as 80% cheaper to exploit, is still an important driver. (For related reading on consolidations, see Biggest Merger and Acquisition Disasters.)

Which names should investors watch, then?

Alpha Natural Resources
Alpha has been an especially active acquirer of late, but may have gone too far in its deal for Massey. While Massey offers some geographic synergy, it was bought at the top of the cycle and the company needs to see met coal prices sustained at a much higher level than the traditional norm. Alpha is also dealing with the rapid cost inflation. Recent moves in the market have put the stock at interesting long-term levels, but the short-term still looks tricky.

Peabody Energy (NYSE:BTU) is not only the largest U.S. coal company, but increasingly a global player with interests in Australia, China, and Mongolia. Peabody has sold out of basins like Appalachia and Illinois, in favor of easier-to-mine PRB coal, but has been active in acquiring offshore met coal assets. Arguably the most respected name in coal, Peabody is a great operator, trading at an interesting price.

Arch Coal
Before buying some met coal assets, Arch Coal (NYSE:ACI) looked ready to surrender its position as the #2 U.S. player. Arch has typically been a savvy miner, though jumping back into Appalachian assets is a bold and contrarian play. Arch does not look as cheap or well-run as Peabody, but a recovery in coal prices could produce more relative earnings momentum here and a better stock outcome.

Walter Energy
Walter has significantly expanded its met coal assets, but by doing so, has worsened its margins and exposed itself to higher costs. There has been a surprising amount of management turmoil recently and big shareholders are restless. If Walter gets its house in order, or can induce a larger company like Peabody or Rio Tinto (NYSE:RIO) to make a bid, the appreciation potential here is considerable. The risk of further decline is also high, if the economy stalls and margins cannot be turned around.

Penn Virginia
Penn Virginia Resource Partners (NYSE:PVR) is an odd duck in many respects; it's a limited partnership, it doesn't operate mines, it leases them, and it has a sizable midstream gas business. It also has a better than 8% yield, a good management team and a solid legacy of prudent growth. With so many miners eager to leave Appalachia, PVR should have appealing asset acquisition prospects and the company pays a very solid distribution. (For related reading on partnerships, see Discover Master Limited Partnerships.)

The Bottom Line
By no means is this an exhaustive list of coal investment prospects. Not only are there miners, like James River (Nasdaq:JRCC), to consider, but foreign entities like China Shenhua, equipment companies like Joy Global (Nasdaq:JOYG) and ETFs like Market Vectors Coal (NYSE:KOL).

Coal is starting to look cheap again, but investors should be cautious when reaching out to grab a falling knife. Buying at the bottom is often a byproduct of luck and excessive risk appetite and often not worth that risk. Still, coal is very much in demand around the world and these stocks look poised to do better, once investors feel a bit better about the economy.

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