This summer when the majority of investors hated the coal sector due to increasing regulations from the EPA, I wrote about a coming bullish reversal in the coal miners as insider buying increased significantly.
I argued coal was not dead and that investors and banks will return to the sector. I believed the major insider buying at the time was bullish and could mark the bottom in the coal sector.
I stated the beaten down coal stocks could outperform the rest of the market. I wrote this past summer, "Insiders may sell for many reasons but they buy for only one… potential profit." Insider buying is crucial at judging potential bottoms and tops. It may have indicated a bottom in the sector as the coal mining stocks are outpacing the general equity market.
Now since July 1st, 2013 the coal mining ETF (KOL) is up 14% while the S&P 500 is up 10%. Coal is still way down compared to equities over the past three years, however coal may be making a comeback and investors may realize that coal is still one of the largest sources of energy in the world today. Some of the individual leaders have been Walter Energy (WLT) up over 75%, followed by Alpha Natural Resources (ANR) up 50% and Peabody Energy (BTU) up over 40%.
Now Goldman Sachs is turning positive on some of these coal miners as they also see a bottom in prices, undervalued share prices and improving cash flows. Goldman is predicting improved balance sheets and possible restructurings.
I happen to agree with their analysis even though it may be a few months late. The switchover to natural gas is not happening as fast since it would cost billions of dollars to transform the infrastructure. There are growing concerns about fracking as well.
Major coal companies such as Peabody and CONSOL (CNX) see the increased demand coming from abroad especially from nations who do not have abundant supplies of natural gas. China is picking up steam in the short term and is expected to grow over the long term.
China will need cleaner and higher quality coals both for thermal and metallurgical applications. Japan is also one of the largest importers of coal.
Many emerging nations are trying to connect their population to electricity. Coal is still one of most economic sources of electricity. India and China are both in need of cleaner coals.
I continue to like large coal miners that are trading near book value such as Peabody, CONSOL, Arch Coal (ACI) and Alpha Natural Resources . The Coal ETF has a yield of 2.2% and has some of these large coal miners in the portfolio. Most of the major coal miners are trading near book value, while Twitter (TWTR) trades more than forty times book value. Long-term value investors should stick to the fundamentals. The major capital gains and dividend growth may be in the coal sector.