Coal ETF Could Require Patience

The Market Vectors Coal ETF (KOL) has struggled this year. A 25.4% year-to-date loss proves as much, but KOL has been a less bed over the past few months. Over the past 90 days, KOL is up 8.6% and since the start of August, the ETF has jumped 6.7%. Now, some analysts see opportunity with a few of KOL’s beaten-up constituents.

Last Friday, Goldman Sachs issued Buy ratings on two KOL holdings – CONSOL Energy (CNX) and SunCoke Energy (SXC). However, Goldman is neutral on the coal industry and suggests investors embrace only those coal stocks with strong balance sheets, reports Johanna Bennett for Barron’s.

“The coal sector continues to face challenges including coal plant retirements, high net debt levels and commodity prices below historical averages. But we see some reasons for optimism, including the bottoming of met coal prices, YTD underperformance versus the S&P500 of 44% and some strong company-specific ideas, namely CNX and SXC,” according to a Goldman note obtained by Barron’s.

CONSOL, KOL’s largest holding, and SunCoke, combine for 10.6% of the ETF’s weight. As for KOL holdings Goldman is not enthusiastic about, the bank has a sell rating on financially embattled Arch Coal (ACI), a stock that represents 2% of KOL’s weight. Goldman is also neutral on Alpha Natural Resources (ANR), Cloud Peak Energy (CLD) and Walter Energy (WLT). Cloud Peak and Walter combine for 4% of KOL’s weight while Alpha Natural is not found among the ETF’s 34 holdings. [Coal ETF Tries to Emerge From the Abyss]

Goldman’s tepid view of the coal industry comes about six weeks after Moody’s Investors Service made comments that implied the worst may be over for beaten up coal stocks. The ratings agency raised its coal industry outlook to stable from negative while saying it does not expect already weak coal sector conditions to worsen over the next 12 to 18 months. [Coal ETF May Finally be Turning Higher]

“Sustained natural gas prices will prop up demand for the thermal coal used in power production through mid-2014 to early 2015, Anna Zubets-Anderson says, while supply rationalization should help stabilize prices for metallurgical coal, which is used in steelmaking. Nonetheless, the US coal industry has little room left to cut costs, and will earn lower EBITDA in 2013 than in 2012 due to lower prices, before EBITDA flattens in 2014,” said Moody’s in August.

Goldman did say that prices of metallurgical coal, the coal grade used to make steel, have bottomed. That could be good news for Peabody Energy (BTU), one of the largest U.S. metallurgical coal produces and KOL’s fourth-largest holding.

Market Vectors Coal ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.