Coal Investors in a Quandary

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If you feel your head spinning like Linda Blair in The Exorcist, you might just be a coal investor.

First one way, and then the other, analysts are spinning confusion, with massively conflicting sentiments for a sector that's been on fire.

The Market Vectors Coal ETF (NYSE: KOL) has gained an incredible 189% from its March low, while surprising profitability from Massey Energy (NYSE: MEE) has sustained a six-month three-bagger. Though not a pure play on coal, miner Teck Resources (NYSE: TCK) has been the darling of the resource rally with a 10-bagger turnaround. With all of these newfound gains in the sector, investors are rightfully keen to map out the road ahead.

I'm certainly glad we have the clear consensus of experts to turn to for guidance at times like these. (Watch out, demon analysts -- my sarcasm burns like holy water.) At this critical crossroads for coal investors, analysts from Citigroup and Macquarie Research issued opposing forecasts. Citigroup boosted the sector Tuesday with price target increases on several quality miners, including Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR). The Citigroup report cited recovering domestic demand for thermal coal and a 43% increase in projected coking coal prices for 2010 and 2011 as rationale for the heightened expectations.

On Wednesday, investors were presented with a starkly different scenario. Macquarie Research analyst Curt Woodworth downgraded the entire coal sector to neutral. He cited continued erosion of domestic thermal coal demand through replacement by cheaper natural gas … a phenomenon I've documented for Fools. In addition, he views China's demand for met coal weakening during the coming year. Woodworth expects Chinese met coal imports to fall from 29 million tons in 2009 to 20 million tons in 2010. Among his long list of company downgrades, he even included my top two picks in the sector, dropping Peabody Energy (NYSE: BTU) to underperform and CONSOL Energy (NYSE: CNX) to neutral.

What's a Fool to do? Of the two, the Macquarie report more closely tracks my own observations of the sector, though I suspect that China could surprise to the upside by churning through those steel inventories before long. I share Woodworth's caution regarding share prices, as the run has been substantial already, but I personally will be looking to build my long-term stake in Peabody Energy on any significant pullback.