The Hottest Sector You Still Refuse to Watch

As strongly as I believe that the development of a renewable-energy infrastructure is crucial to charting a more sustainable path into the future, as an investor I refuse to overlook the enticing outlook for the coal-mining sector.

I've been reporting developments from this sliver of the market for several years now, and I remain amazed by the juxtaposition of an unmistakably bullish long-term investment opportunity and a noticeably lackluster level of interest among investors. Fools have been privy to the series of insider forecasts from well-informed equipment manufacturer Joy Global (Nasdaq: JOYG  ) and the oft-repeated assessment by Peabody Energy (NYSE: BTU  ) that coal is in the early stages of a global supercycle.

Now, after a fairly sharp selloff in commodity stocks over the past couple of months, Goldman Sachs analyst Andre Benjamin considers the entire coal sector "attractive." He selected Patriot Coal (NYSE: PCX  ) as a particular standout, associated with a "conviction buy" rating and a 12-month price target of $29 -- some 50% above where the stock traded Monday. The analyst's price target for Peabody Energy now stands at $75, implying a potential 38% increase, while CONSOL Energy (NYSE: CNX  ) earned an upgrade to neutral and a $59 price target, implying a potential 28% increase. Walter Energy (NYSE: WLT  ) was downgraded to neutral, despite a potential 33% advance implied by the analyst's $140 price target.

Expecting the sector as a whole to see average gains of up to 35% after a deep countercyclical dip, Benjamin adds: "We expect recent increases in thermal exports and lower production levels to persist, leading to near-normal thermal coal inventories by year's end and forcing domestic utilities to sign baseload contracts for 2012 at prices above mid- cycle." Fools will recall that stockpiles of thermal coal at U.S. utilities surpassed 200 million tons during 2009, and by this past February those utility stockpiles had already improved to less than $162 million tons. Exports of U.S. coal, which surged 47% over prior-year levels during the first quarter, are accelerating the pace at which that supply overhang is cleared from the market and helping to pave the way to sustained pricing strength for domestic producers.

If I'm incorrect in my assertion that investors continue to routinely overlook coal stocks despite what Arch Coal (NYSE: ACI  ) recently described as "a multiyear upswing in the coal market," then I look forward to reviewing scores of adamant declarations of investment interest within the comments section below. In the meantime, I have added Patriot Coal, Arch Coal, and the Market Vectors Coal ETF (NYSE: KOL  ) to my silverminer CAPS portfolio, in hopes that members of the Fool community will generate an electrical current of interest in this potentially powerful sector.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Peabody Energy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 20, 2011, at 10:06 PM, GoNuke wrote:

    The value of my cloud peak shares just keep falling :)

  • Report this Comment On June 21, 2011, at 9:26 AM, XMFSinchiruna wrote:

    GoNuke,

    Thank you for establishing that at least one person out there is invested in a coal stock. :)

    I just took a little trip down memory lane after your mention of Cloud Peak. It seems such a short time ago that I was encouraging Fools to "get their head in the cloud" following the market's weak reception of the company's November 2009 IPO.

    http://www.fool.com/investing/value/2009/11/23/get-your-head...

    It's important to keep that long-term perspective, recognizing that the stock has outpaced the S&P 500 since its IPO with a 31.5% return, and also to interpret the recent slide (it had been up as much as 70% from its IPO debut just a few months ago) within the proper context of a broader resource-sector selloff that I consider nothing more than a temporary consolidation event.

    It looks to me as though Cloud Peak is rapidly coming into its own: expanding production toward 100mt, replenishing reserves with two strategic coal-lease acquisitions at West Antelope II, and putting cash flow to work with an aggressive capex budget for 2011.

    It remains an interesting stock with an attractive valuation, and I will seek to keep a closer eye on it going forward after letting my vigilance lapse on that one for a spell. Thank you for prompting a fresh look, and good luck with your position!

    Sinch

  • Report this Comment On June 21, 2011, at 12:36 PM, t0bes wrote:

    Great article Chris. You've recommended coal stocks a few times and I've had them on my radar but not had the funds to purchase any yet. I was surprised to see you also don't own any of those mentioned. Do you still see more potential elsewhere?

    Thanks

    Dave

  • Report this Comment On June 21, 2011, at 1:45 PM, XMFSinchiruna wrote:

    Dave,

    Thank you for bringing to my attention that I overlooked my small remaining Peabody Energy position above. I pay close attention to the accuracy of my disclosure statements, and regret the unintended omission in this one case.

    I sacrificed some coal holdings in favor of cash a couple of months ago as I became increasingly defense-oriented. I may be interested in rebuilding some additional long-term coal exposure going forward.

    My own personal resource allocation continues to be keenly focused upon precious metal miners and explorers, and certainly there are times when it is difficult to find room in one's portfolio for all the potential opportunities one uncovers during research.

    You can view the full list of tickers representing my current equity holdings at my Motley Fool profile page linked below:

    http://my.fool.com/profile/TMFSinchiruna/info.aspx

  • Report this Comment On June 21, 2011, at 3:25 PM, Brettze wrote:

    Environmentalists still favor coal stocks over aluminium stocks . We are beginning to export coal to China to support its vast aluminium smelting operations , many are built long before Mao's Long March inthe 1950's. Anyway, enviormentalists want to see ALCOA dead! China is producing one third of the world's aluminium and all is dokey okey with enviormentalists .. Coal is much cleaner than aluminium , right?> (shaking my head) What are we thinking , really? We are holding trillons in fossil fuel investments and we will do all we can do to protect them... Aluminium is a big threat to fossil fuel invesments due to lightweightness, solar energy metal of choice, infinite recyclability with ultra low energy requirments. Enviormentalists are not thinking straight , I am telling y'all! Are you sure you should still refuse to look at aluminium stocks? Refuseniks everywhere!!

  • Report this Comment On June 21, 2011, at 3:29 PM, Brettze wrote:

    Coal stocks had already gone up 100-500% while aluminium stocks is still languishing .. How come? We dont want real soltuions to our energy crisis which is the reason why ! We know that aluminium can go a very long, long way to solve our problems especially in our energy area.. We chose to ignore aluminium and instead protect our fossil fuel investments .. Our energy crisis is gong to get worse and worse to a point where we will be really forced to start embracing aluminium.. I just know that... We resist change... simple as that.. Aluminium is a very simple solution to our huge energy problem!! We have "NO WAY" stamped on all our foreheads!!

  • Report this Comment On June 21, 2011, at 3:39 PM, Brettze wrote:

    I would never touch coal stocks again because I know that aluminium can and WILL cut demand on coal ... If you believe in global climate issues like melting glaciers, coral reef gone white in oceans, polar bears either drowing in ocean or mutlitaing with grizzlies down south which yields American's own version of Panda bears... and things like that.. Then BUY aluminium stocks! Aluminium is relatively a new metal just invented 125 years ago as compared to 3000 years for copper and iron.. We are so brainwashed with copper and iron that scientists find copper and iron genes in our DNA... I am exaggarating a bit.. but you know that aluminium is very brand new metal and we still produce only 40 millon tons per year against well over one BILLON tons of iron/steel that is cooked with COAL! Iron cannot reflect sunlight as well as aluminium can... We can multiply aluminium almost limitlessly that will reflect and CONCENTRATE sunlight into many new useful applicatoins like cooking , lighting, heating everywhere. We will still use oil, coal, natural gas , hydro with far less worries about shortages if ever again.. ALUMINIUM can SOLVE our energy crisis almost like a snap of fingers. We still REFUSE TO WATCH ALUMINIUM AT ALL!! Analysts had tried to explain with great lameness about the bright future of aluminium.. Our minds are so blocked against aluminium's greatest merits that we are still unable to solve so many of our problems like budget deficits, unemployment, high oil prices, collapsed real estate values, etc.. Things still continue to get worse and we STILL REFUSE TO WATCH ALUMINIUM STOCKS... Whoa! whoa! whoa! please .... save yourselves!!

  • Report this Comment On June 21, 2011, at 3:51 PM, Brettze wrote:

    WATCH ALUMINIUM IT WILL PLAY A CENTRAL ROLE IN SOLVING MANY OF OUR PRESSING PROBLEMS AND ISSUES... They will simply go away as we increase alumimnium production and put them in more new uses we never knew we could... ALUMINIUM is going to be the SAVIOR to our world! many of you know that but chose to ignore aluminium as long as fossil fuel is still more attractive to you for the very wrong reasons like I mention in preceding comments.. Fossil fuel is very disruptive to almosat everything we have already and continue to get worse... For you who still watch fossil fuel like coal, are just profiteering from it without giving a thought about the destruction it has wreaked on ourselves... It is almost like a narcotic if there is no other better word for coal or simiilar fossil fuels... We are getting so high from coal , oil, natural gas, hydro, nuclear ... Do you know that we are actually fracking the earth crust in efforts to free up natural gas , oil .? I am not saying that it is bad for our enviroment unless we are doing it on a very large scale which we already are doing... Tehre is no telling what will or may happen next.. You just dont realize how short sighted you are about your fossil fuel investments already amounting into trillons of dollars all over the world... Aluminium has yet to hit its first trillon in investments , but I am telling you that it will and , yes, it will happen ... I am so sure in my heart that you want to save yourselves...So just start watching aluminium instead of coal.. Coal is so YESTERDAY!! Coal will still be around for a long time to come but will not be as important as you may be led to believe so will oil, natural gas, nuclear , hydro, etc.. ALUMINIUM will be the SAVIOR TO all of you... It is the ALUMINIUM CENTURY AND WE ARE ALREADY ON THE SECOND DECADE OF THE CENTURY.. what are you waiting for ??? really????? C'mon !!

  • Report this Comment On June 21, 2011, at 3:53 PM, Brettze wrote:

    I know it is almost impossible to drag a donkey to drink water but I am strong and I can do that!!

  • Report this Comment On June 21, 2011, at 3:55 PM, Brettze wrote:

    I am going to drill deeper into your subconsiciousness until you finally wake up and start to watch aluminium at last!

  • Report this Comment On June 21, 2011, at 3:55 PM, Brettze wrote:

    Coal begone!

  • Report this Comment On June 21, 2011, at 3:55 PM, Brettze wrote:

    Firewood begone!

  • Report this Comment On June 21, 2011, at 3:56 PM, Brettze wrote:

    Hate crime begone!@

  • Report this Comment On June 21, 2011, at 3:56 PM, Brettze wrote:

    Hateful investments has to be curtailed!

    Cynicism has to be eliminated once for all!

  • Report this Comment On June 21, 2011, at 3:57 PM, Brettze wrote:

    Stop now and listen!

  • Report this Comment On June 21, 2011, at 3:57 PM, Brettze wrote:

    aluminium is mine!

  • Report this Comment On June 21, 2011, at 7:31 PM, CajunMac wrote:

    I bought Patriot Coal (PCX) back in April 2009. Since then it is up 400%. It is one of the best stocks I hold in my portfolio. I was fortunate to buy it when it was at its lowest. Hopefully what Goldman is predicting will come true.

  • Report this Comment On June 22, 2011, at 7:36 AM, XMFSinchiruna wrote:

    CajunMac,

    Congratulations on an astute selection paired with impeccable timing. :)

    Brettze,

    Sounds like someone likes Aluminum! Maybe if you start by petitioning to have it renamed to "savioroftheworldmetal", you'll find people more receptive to your cause.

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