Seeking out the 10 mid caps to rule them all is the only logical follow-up to seeking the 10 small caps to rule them all. Unlike small-cap companies that offer investors the potential for high-risk, high-reward returns, mid-cap companies usually have significantly less risk built in because of their proven business track records. These companies offer either distinctive products or exceptional value to investors -- or possibly both.
For reference, here are the choices for the previous five weeks:
This week, I want to highlight a company in an underappreciated segment of the energy sector: coal. Let's take a closer look this week at Arch Coal (NYSE: ACI) to see why it belongs in the 10 mid caps to rule them all.
What it does
Arch Coal operates 23 coal mines located throughout the U.S. and currently has 4.4 billion tons of estimated proven and probable coal reserves. It sells its coal to coal-fueled power plants, steel mills, and industrial facilities around the world.
People may not think of coal as a primary energy source, but it currently provides more than half of all energy generation in the United States. Arch Coal is therefore sitting in a pretty position to capitalize on a basic but necessary demand for more energy. Coal demand has never been higher, which could portend great things for Arch shareholders.
How it stacks up
Not to overplay the effect that the earthquake in Japan had on the energy generation sector, but nuclear energy's future is very much in question. Nuclear reactor builders Siemens (NYSE: SI), Hitachi (NYSE: HIT), and General Electric (NYSE: GE) could be facing an industrywide slowdown with Germany choosing to go nuclear-free by 2022 and potentially other countries following suit.
Arch Coal doesn't have these worries. It's no secret that green energy groups are working as diligently as they can to move away from the United States' dependence on coal as a "dirty fuel," but it's also pretty evident from the statistics that coal is ingrained as a safer alternative to nuclear power. Coal mining itself doesn't come without its own set of tragedies, but its power generation has considerably safer applications than that of nuclear energy.
Let's take a look at how Arch Coal stacks up relative to some of its peers:
|
Company |
Price/Book |
Forward P/E |
Debt/Equity |
Dividend Yield |
|---|---|---|---|---|
| Arch Coal | 1.76 | 6.6 | 70% | 1.80% |
| CONSOL Energy (NYSE: CNX) | 3.34 | 10.9 | 116% | 0.90% |
| Patriot Coal (NYSE: PCX) | 2.09 | 7.5 | 54% | 0% |
| Peabody Energy (NYSE: BTU) | 3.01 | 9.6 | 56% | 0.60% |
Arch Coal has the quickest growth rate of its peers and not surprisingly pays out the highest-yielding dividend of the bunch. Patriot Coal is currently losing money and doesn't pay out a dividend while CONSOL is mired under a heap of debt. Peabody offers greater competition to Arch than either Patriot or CONSOL, but at three times book and with only one-third the dividend yield, why not take the cheaper and faster growth play in Arch?
How it could make you money
One of the most appealing aspects of Arch Coal is that it negotiates long-term contracts for its product. This isn't to say that Arch doesn't need to stay on top of its game and continue to negotiate deals for the future, but it does net Arch a relatively steady flow of cash.
Also of note, the size of Arch's operations works in its favors and allows it a competitive advantage over some of its smaller rivals. Arch's low production cost leads to higher margins than many of its peers, translating into a stronger bottom line and a higher dividend yield.
I again can't talk enough about the strong position coal finds itself in with relation to nuclear energy. It wouldn't surprise me at all to see an increased reliance on coal as countries push further away from nuclear energy following the tragic events in Japan. This should allow Arch to continue to lock up long-term contracts at a steady rate.
Are you willing to invest in the other black gold? Share your thoughts on Arch Coal in the comments section below and consider adding Arch Coal to your watchlist to catch up on the latest news in the coal sector.
