Pigs Flying? No, But Coal's Beating The Market

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The long-term prospects for coal companies look particularly bad, as competition from cheaper fuels and stricter environmental regulation may yet run them out of business. But short-term investors are finding a lot to love about coal in the here and now.

Shares of coal companies like Alpha Natural Resources (ANR), Alliance Resource Partner (ARLP), Peabody Energy (BTU), Arch Coal (ACI) and Consol Energy (CNX) are up between 15% and 27% since late June. By contrast, the S&P 500 is up 8%.

ANR Chart

NYSE:ANR data by YCharts

But going forward, one has to ask: is this rally merely undoing a plunge in the stocks that went too far. Or is there more room to run for these stocks?

Coal mining shares generally have lost about half their value in the past couple of years as long-term investors fled. Sustained low natural gas prices led coal’s biggest customers to switch fuels; cooling economies in China and elsewhere depressed demand further; and looming environmental regulations threatened to make coal production prohibitively expensive.

The news lately has mainly reinforced the sentiment that coal is a risky long-term investment. Natural gas prices are higher in 2013, but still expected to stay below $4 btu for at least a couple of years. China, a major buyer of U.S. coal, is making a concerted effort to reduce coal imports even as they fall naturally with slower economic growth. U.S. coal production is headed toward a 20-year low this year.

US Coal Production Chart

US Coal Production data by YCharts

Moreover, the U.S. Environmental Protection Agency announced proposed rules last week that would almost certainly make building new coal plants economically unfeasible. Those rules are out for comment and could be enacted next year. Perhaps even more concerning for the industry are new rules the EPA is drafting for existing power plants. Those proposals, due out by June 2014, could require upgrades that many debt-heavy coal companies can ill-afford.

But the possibility of a doomsday averted, or at least long delayed, has made coal a popular play for short-term investors. Share prices throughout the sector started rising in late June, when natural gas prices were deemed high enough for coal to recoup a few of its former customers. In August, Moody’s changed the outlook for the coal industry from negative to stable though 2014, on the assumption that production has hit bottom.

How long can it last? The Wall Street Journal pointed out recently that any rally in coal mining shares could give the companies reason to raise much needed equity, which could quickly erase gains. With bearish news swirling, investors are left to somehow time the rallies and get out ahead of the declines. Best of luck with that strategy.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.


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