Is Alpha a Natural Resources Winner?

There are one-hit wonders, and then there are those stocks for which the initial big move is only a preview for even bigger and better gains to come.

Coal miner Alpha Natural Resources (NYSE: ANR  ) rose 29% over the past month, bested only by James River Coal (Nasdaq: JRCC  ) which surged 73%, as the industry responded to better prospects for manufacturing growth, more government spending in China, and the switch from coal-fired utilities to gas-fired ones slowing as natural gas prices rise. The Motley Fool CAPS Coal sector, representing 33 coal companies, was up almost 10% over the last 30 days.

Alpha Natural Resources snapshot

Market Cap

$1.9 billion

Revenues (TTM)

$8.2 billion

1-Year Stock Return

(64.8%)

Return on Investment

(21.3%)

Estimated 5-Year EPS Growth

19.5%

Dividend and Yield

N/A

Recent Price

$8.71

CAPS Rating

***

Source: FinViz.com. N/A = not applicable; Alpha Natural Resources doesn't pay a dividend.

A mighty temblor
The September purchasing managers index from the Institute for Supply Management pointed to an economy expanding once more following three consecutive months of contraction, driven higher by new orders and higher prices. Economists are also anticipating China will see its economy expand once again in October, though the flash PMI compiled by HBSC (NYSE: HBC  ) indicates an improving situation through an economy that's still contracting.

Natural gas prices are pushing higher, too, and rose above $3.40 per million Btus, as the potential for a period of cold weather excited the possibility for new demand. When gas traded below $3 per mm Btus, there was much greater incentive for utilities to convert their plants to gas, even beyond those created by tough new EPA rules. Despite record low prices for coal, gas was still a cheaper alternative, but now that they're on the rise again, coal might become the fuel of choice once again (it's apparently fairly easy for utilities to bounce back and forth between gas and coal by simply swapping out the appropriate injector nozzles).

Gas is still a tough competitor, and a recent Reuters story highlighting how Dominion Resources (NYSE: D  ) is shutting a nuclear power plant in favor of a gas-fired one indicates the battle isn't yet over, rising prices or no (that can't be an easy changeover).

Getting left back
Alpha really needs both dynamics to play out, though, if it wants to regain the ground it's lost over the past year. It's the second-largest coal producer by revenue and third-largest by production, behind Peabody Energy (NYSE: BTU  ) and Arch Coal (NYSE: ACI  ) , but it's the biggest metallurgical coal producer and a major thermal coal supplier, though the latter makes up the vast bulk of its sales volume, or 79% of the total.

It would be nice to think that following Arch's positive earnings surprise last week, when it turned in a profit instead of the forecasted loss on recovering demand, Alpha will similarly surprise to the upside when it reports on Friday, but Cliffs Natural Resources (NYSE: CLF  ) is missing on its own results.

Now Alpha Natural Resources is one coal play I actually like, and the recent political talk suggests some of the stronger names in the space will still come out standing tall. So I've rated the coal miner to outperform the market indexes on Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into ratings from one to five stars. The stock, though, has dropped 33% since I weighed in on it compared to a 5% rise in the S&P 500, but I'm confident it will ultimately go on to surpass the broad indexes.

Feel free to comment below on whether you think the miner will be able to dig its way out of the hole it finds itself in.

Going to the head of the class?
Coal isn't the only industry counting on continued economic growth in China for sustenance. Heavy equipment makers like Caterpillar have a vested interest in the country's expansion. Despite some solid competitive advantages, there are strategic risks confronting it, and you can read all about them in the Motley Fool's brand-new report. Just click here to access it now.

Rich Duprey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Dominion Resources. Try any of our Foolish newsletter services free for 30 days.

We Fools may not 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.


Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 30, 2012, at 6:48 PM, Paulson545 wrote:

    The harsh winter is coming early, in my opinion the price of N Gas and Coal will start to move up soon. Arch Coal seems way undervalued.

  • Report this Comment On October 31, 2012, at 3:31 PM, iridium18 wrote:

    Cliff's Natural Resources' poor performance was related to their iron-ore production and not related to coal. Approximately 89% of CLF's total revenue comes from Iron Ore and only 8% from coal. Therefore, I would not recommend using CLF's performance as a future indicator of coal unless you solely analyze their coal division. For the record, their coal division saw a 157% YOY increase in coal sales volume and revenue per ton was up 30% YOY.

  • Report this Comment On November 01, 2012, at 2:41 PM, tjsimone wrote:

    (it's apparently fairly easy for utilities to bounce back and forth between gas and coal by simply swapping out the appropriate injector nozzles).

    I really hope you dont beleive this.....

    "Switching " refers to physical utilities. For example, a utility might have 4 coal plants, and 4 Natural Gas Plants. When coal was being used, Utilities used Coal as main source of power, and the Natural gas plants for "peak" usage intervals. Recently, it had flipped. Thats what " switching" refers to.

    You just dont change a nozzle......

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