This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on. Today, we'll be taking a particularly close look at America's coal industry, where Goldman Sachs has just upgraded shares of Consol Energy (NYSE:CNX) -- but reiterated sell ratings on both Walter Energy (OTC:WLTGQ) and Alpha Natural Resources (OTC:ANRZQ).

Let's find out why, beginning with Walter.

Walter Energy -- still a sell?
Getting an analyst to publicly adopt a sell rating on a company that might -- absent a negative note -- hand it some lucrative stock and bond underwriting work is like pulling proverbial teeth. Sometimes, the valuation may require it. But few banks go out of their way to advertise the fact that they're not thrilled with a company's valuation. So it's interesting to see Goldman Sachs today not just sticking with its existing "sell" rating on Walter Energy, but actually going out of its way to remind investors about it.

In a note today on why it's upgrading shares of rival Consol Energy (about which, more in a moment), Goldman pointed out that it's not optimistic about the prospects for "met" coal producers like Walter. Metallurgical coal is used by steelmakers to smelt steel, and this is Walter's business.

It's not a particularly good business, however. Unprofitable and burning cash for the past two years, Walter Energy has reduced its rate of cash burn this past year, but still ran through about $105 million worth of negative free cash flow over the past 12 months, according to S&P Capital IQ data. The company still has more than $400 million in cash on its balance sheet, and is not at risk of going bankrupt anytime soon at its present rate of cash burn. But with long-term debt of $2.9 billion, and pension obligations pushing $600 million, the stock's balance sheet  hardly looks healthy.

According to, Goldman Sachs says it tends to "favor companies with stronger balance sheets." That's not Walter. Hence the sell rating.

And Alpha Natural Resources is, too
The story with Walter peer Alpha Natural Resources is both better and worse. With more of a thermal coal business (used to generate electricity for energy utilities) to bolster its met coal operations, Alpha's "profit" margin is slightly less bad than Walter's, at "only" negative 22.4%. And Alpha only began burning cash last year.

But its free cash flow is still negative -- negative $221 million for the past 12 months. And Alpha hasn't earned a full-year profit since 2010, and reported GAAP losses in excess of $1 billion for the past 12 months.

Viewed from Goldman's perspective of focusing on the balance sheet, Alpha Natural boasts stronger cash reserves -- more than $900 million in cash and equivalents. However, it also carries more debt -- $3.4 billion in long-term debt, and nearly $1 billion in pension obligations. The fact that the company recently began reporting negative operating cash flow -- before even subtracting capital expenditures to reach a negative free cash flow numbers -- suggests the company won't be in a position to begin paying down this debt from cash production any time soon.

So once again, a sell rating here seems appropriate.

Hope burns eternal
But what about Consol Energy? What makes it different from its coal-producing peers, and what explains Goldman's decision to upgrade it to "buy" today?

After all, like Walter Energy, Consol hasn't generated a penny's worth of positive free cash flow in two years, and burned through $871 million in negative free cash flow over the past 12 months. Like Alpha Natural Resources, Consol also has exposure to the met coal market that Goldman looks askance at. SO what's to like?

There are a few things, I suppose. For example, Consol gets less than 20% of its revenues from the met coal market, and makes the bulk of its money from selling thermal coal. It's also got exposure to natural gas production to further diversify its business.

From a GAAP perspective, Consol is the only one of these three coal companies to have consistently reported positive net income over the past five years. Indeed, its reported profit over the past 12 months was the best number Consol has reported -- ever. If the company can begin producing free cash flow numbers similar to what it's reporting on the bottom line of its income statement, then maybe Consol will be able to begin paying down its $3.1 billion debt load ($4.1 billion if you count pension obligations).

Still and all, if Goldman is going to stick with its statement that balance sheet strength is paramount, then the fact that it prefers Consol Energy over its rivals just doesn't make sense. Consol carries nearly as much debt and Alpha Natural, and more debt than Walter. Given this fact, I just can't see the stock as attractive -- especially since, for the time being at least, Consol is not generating free cash flow at all.

Unless and until one of these coal miners figures out how to turn a cash profit from its business, I just can't dig the idea of investing in any of 'em.