Steinberg likes coal stocks, including Arch Coal (ticker: ACI) and Alpha Natural Resources (ANR). Coal companies have taken a beating in recent years. Warm winter weather and a plunge in natural-gas prices, which led some power companies to switch their fuel source to gas from coal, set off a slide in thermal coal prices. And slowing economic growth dragged down the price of metallurgical coal, used to make steel. Last year, Patriot Coal succumbed to bankruptcy. Arch Coal, a high-grade thermal coal producer, added to its woes with a poorly timed purchase of a metallurgical coal outfit in 2011, just before prices slid from $300 a ton to less than $200. It packed on debt in the process. Shares have tumbled from $44 to $5 and change in five years.
GLTA I am long both JRCC and ACI, and am not having fun holding, but have high hopes for the next year to 18 months.
However, natural-gas prices have recently risen, as drillers have closed unprofitable wells. That has stalled the shift from coal to gas at power companies. Current gas prices imply that coal from the Powder River Basin in Montana and Wyoming, where Arch operates, should fetch 50% more than it does, according to Morningstar analyst Joung Park. This "extreme dislocation" will resolve once power companies burn through elevated coal inventories, Park predicts.
Arch isn't currently profitable, and big acquisition charges may continue to impair its earnings. But Wall Street expects it to bring in free cash of nearly $1 a share next year, rising to more than $2 by 2015. That could help the company reduce its debt load and fetch a much higher stock valuation. Alpha Natural Resources is in a similar position, but with more exposure to metallurgical coal, and thus, to economic improvement, particularly in Europe and China. For now, the company is cutting production to keep losses to a minimum. Shares sell for just over one-third of the book value of Alpha's assets.