In the world of investing, no news can often be good news.
A wide range of energy sources have been hit by bad news in
recent months. Yet one key energy source has been out of the
spotlight, but is likely to actually benefit from the unfolding
events of 2011. I'm talking about coal, which now stands to play a
greater role in global energy generation than many had previously
Not like tobacco
During the past decade, many investors have viewed coal stocks in
the same light as tobacco stocks. Each industry appeared headed
toward the sunset due to changing values regarding health and the
environment. And with growth prospects dimming,shares of many
stocks in these two industries were stuck with very low
) ratios and EBITDA (earnings before interest, taxes,
) multiples. Indeed, almost all of the key coal players are also
very cheap in relation tofree cash flow (
Arch Coal (NYSE:
Alpha Natural Resources (NYSE:
sport eye-popping 18% (
) yields, based on consensus 2012 projections.
Yet coal now looks to shake off the perception that is in
decline, if only because other energy sources are running into
their own troubles. For example:
- The events in Japan have surely jolted the prospects for
nuclear power plants. Many countries had plans to meet their
rising energy needs through new nuclear plants. Those plans are
now on hold and, if some of these countries decide to diminish
their focus on nuclear, then coal stands to benefit.
- The Obama administration had aggressive plans to develop
solar- and wind-power plants in the United States, but a more
hostile Congress more closely aligned with King Coal and Big Oil,
coupled with the fact that solar and wind can't really make a
sizable dent in our energy needs means that efforts to
de-emphasize coal are waning.
- The U.S. tradedeficit is one of the key factors behind
bipartisan economic concerns about our competitive positioning.
As oil surges toward the $110 per barrel mark, pressures on the
only increase. As the United States is the "Saudi Arabia of
coal," our nation's trade deficits could be meaningfully
curtailed if we boost our use of coal.
Right now, none of these factors have come to roost. These
recent developments will take time to play out. But the view for
2013 or 2015 just got brighter for coal.
What about natural gas?
In recent years, natural gas has stolen the spotlight, as it's
relatively clean-burning and quite abundant. That's why all new
power plants currently under construction will focus on gas. But
all is not rosy with natural gas either. A recent study has just
concluded that natural gas' benign environmental profile has been
overstated. The methane released during gas production now appears
to be affecting the climate in more insidious ways than carbon
dioxide. (I should note that I am in the camp that sees rising
atmospheric carbon as the result of human activities, and I also
believe we should be more aggressively addressing the issue. But as
an investor, I need to rationally assess coal in the view of the
current political and regulatory climate.)
If concerns about natural gas' impact continue to build,
coal-fired plants may get a new life. Moreover, if natural gas is
increasingly seen as a viable transportation source in the United
States, then rising demand could push prices up, benefiting coal
prices in tandem.
That scenario is still in question. What's not in question is
coal's rising demand from our trading partners. Exports of coal are
starting to build, a process which will only be aided by the
newly-weakened dollar. Plans are afoot to build a string of coal
export facilities in the Pacific Northwest, though it will be
several years before the first one comes online. Exports should be
a key theme on upcoming industry conference calls. "European prices
will now attract exports, and we expect significant discussion of
port capacity and export potential," note analysts at UBS.
Analysts also anticipate a continuation of the recent industry
that has seen companies like
Walter Energy's (NYSE:
2011 purchase of Western Coal andAlpha Natural Resources'
2011acquisition of Massey Energy.
International Coal Group (NYSE:
is widely rumored to be the next company to be acquired.
The best ways for investors to play
Wall Street analysts each have their own favorite names in the coal
sector. Here's a sampling:
- Citigroup recommends
Peabody Energy (NYSE:
, thanks to a very high degree of exposure to Australia and Asian
markets. The $74 price target is 15% above current levels.
- Goldman Sachs is a big fan of Walter Energy, noting that the
Western Coal deal should bring strong growth prospects. They see
shares rising from $130 to $165, or roughly 25%.
- Brean Murray favors
Natural Resources, noting that its Massey
a lot more synergies than most analysts are currently
forecasting, perhaps upwards of $200 million. They see shares
rising from a current $54 to $81 -- a 50% move.
Action to Take -->
Coal stocks remain off the radar for most growth investors. But
industry consolidation, newly-emerging problems for other energy
sources, and a weaker dollar that is fueling exports can give this
industry a much longer shelf life than many had assumed. As an
alternative to the stocks I mention above, investors should also
Market Vectors CoalETF (NYSE:
, which holds a basket of coal stocks and offers broad exposure to
-- David Sterman
I don't know if you're aware of this or not, but a 20-year
energy agreement between the United States and Russia is about to
expire. The problem is, this deal supplies 10% of America's
electricity. When the Russians refuse to renew the agreement, the
U.S. will face an entirely new kind of energy crisis. This
disruption could send a handful of energy stocks through the roof.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.