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The Hottest Sector You Still Refuse to Watch

By Christopher Barker - Updated Apr 6, 2017 at 9:03PM

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Coal stocks fly under the radar despite a burning-hot outlook.

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.

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Stocks Mentioned

CONSOL Energy Inc. Stock Quote
CONSOL Energy Inc.
CNX
$16.67 (1.28%) $0.21
Peabody Energy Corporation Stock Quote
Peabody Energy Corporation
BTU
Joy Global Inc. Stock Quote
Joy Global Inc.
JOY
Walter Energy, Inc. Stock Quote
Walter Energy, Inc.
WLTGQ
VanEck Vectors ETF Trust - VanEck Vectors Coal ETF Stock Quote
VanEck Vectors ETF Trust - VanEck Vectors Coal ETF
KOL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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