Cramer's Mad Money - 6 Ways to Play the Coal Supercycle (3/17/11)

by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday March 17.

The Coal Supercycle: Peabody (BTU), Walter Energy (NYSE:WLT), Alpha Natural (ANR), Massey Energy (NYSE:MEE), Patriot Coal (PCX), James River Coal (JRCC), Consol Energy (NYSE:CNX), Cloud Peak Energy (NYSE:CLD), Arch Coal (ACI), International Coal Group (NYSE:ICO), BreitBurn Energy Partners (BBEP), SandRidge Energy (NYSE:SD)

In the wake of Japan's nuclear crisis, coal is king. Even before the tragedy, Peabody (BTU) management said the commodity is in a supercycle, and after the nuclear crisis, the stock is at a 52-week high. Cramer predicts many nuclear plants around the world will be scrapped, decommissioned or built only in countries where there is limited democracy and the citizens can't complain. While natural gas looks like another great alternative to nuclear, it is difficult to transport and doesn't have the same capacity to reach emerging markets as coal, which is easy to export.

The EPA made new regulations requiring coal plants to install equipment that will reduce pollution. While this will cost coal companies some money, Cramer thinks it is good news, because it takes worries about plant closings off the table and shows that the government is open to the possibility of cleaner coal. Overseas, coal demand continues to roar higher, as a new coal plant opens every week to ten days in China.

Cramer gave viewers six ways to play the coal supercycle. He prefers coal producers on the East Coast of the U.S. rather than the West Coast, because the latter companies with exposure to the Powder River Basin are more landlocked and lack the same export capability as their East Coast peers. There are two primary uses for coal: thermal, for heating, and metallurgical, for making steel. Cramer likes companies that have exposure to both kinds of coal.

1. Peabody (BTU) is Cramer's favorite coal stock, even at its 52-week high. "This is the Exxon Mobil of coal" and has the best exposure to Asia with its mines in Australia.

2. Walter Energy (WLT) is Cramer's top metallurgical coal pick, and has fallen 10 points in the last two weeks. The stock is a buy.

3. Alpha Natural Resources (ANR) is a play on both metallurgical and thermal coal and announced in January the acquisition of Massey Energy (MEE). The merger will make Alpha the third largest metallurgical coal company. The stock has dropped to $55 from its January high of $67, and while it is up from its low of $50, Cramer would buy.

4. Patriot Coal (PCX) is a thermal and metallurgical coal hybrid company that is down four points from its February high.

5. James River Coal Company (JRCC) was focused on domestic thermal coal, but is boosting its international exposure with an acquisition. The stock is down from its January high of $27 to $22 and has more room to run.

6. Consol Energy (CNX) has over 80% of its sales from electric utilities companies. The stock has run from $45 in February to $55, and Cramer thinks Consol is buyable only on a pullback.

2 Coal Stocks to Avoid:

Cloud Peak Energy (CLD) and Arch Coal (ACI) both get most of their revenues from the West Coast Powder River Basin, and therefore, their export capability is limited. Cloud Peak is up 43% since its November 2009 IPO, and Cramer would take profits.

Cramer took some calls:

International Coal Group (ICO) could be a takeover target, but Cramer admitted it is not his favorite.

BreitBurn Energy Partners (BBEP) has a high 7.95% dividend that at one time concerned Cramer, but with oil high, he is no longer worried about the yield; "I'm on board."

SandRidge Energy (SD) can be a volatile stock, but Cramer thinks it is a great situation, and if it comes down a dollar, he's "all over it."

Stay Close to the Shore: Freeport McMoRan (NYSE:FCX), Joy Global (JOYG), Potash (NYSE:POT), Amazon (NASDAQ:AMZN), General Motors (NYSE:GM), Kinder Morgan Partners (NYSE:KMP), Brandywine (NYSE:BDN),

Even though the Dow was up 161 points on Thursday and the S&P 500 rose 1.3%, the rally was not a day at the beach, because there were no lifeguards on duty. Cramer urged investors not to get too excited and to "stay close to the shore."

Several news items brought stocks up, including new hope in the containment of radiation in Japan. The number of workers sent to deal with nuclear reactors was increased sixfold and the military was brought in to handle this potentially life-threatening task. Since soldiers, unlike regular workers, are expected to do dangerous work on occasion, the involvement of the military increased confidence that the radiation problem could be contained. However, there are additional worries, including concerns that the wind spread the radiation throughout the country.

The headlines are focused once again on civil unrest in Bahrain, but this news sent up oil stocks, which have been hammered the last few days. Oil seems to be rising higher, a great trend for oil companies, but bad news for consumers who might choose not to shop if they have to pay more at the pump.

Although worries about European economies have been increasing the past few weeks, the euro saw a "gigantic, spectacular" move up that indicates the European economy is not only alive and well, but might be on fire. Agriculture and materials stocks that have declined on Europe's woes rallied on Thursday. Cramer thinks Freeport McMoRan (FCX), Joy Global (JOYG) and Potash (POT) could go higher.

On The Street's beach, the tides turn on euphoria and fear. On good days like Thursday, investors can feel confident, but should be careful. While things seem better one day, they could look worse the next.

Cramer took some calls:

Amazon (AMZN): Cramer is worried about headline risk for Amazon for the short term, especially concerning the issue of taxes, and thinks its growth rate might slow down. He would be careful about Amazon and would wait to buy until it goes lower.

General Motors (GM): Of all the auto companies, GM has the least exposure to Japan. While there is concern about overhang and personnel changes, Cramer thinks the stock should be bought.

Kinder Morgan Partners (KMP), Brandywine (BDN): Cramer likes both of these dividend stocks, and thinks both will go higher, even though KMP has run already.

Southwestern Energy (NYSE:SWN), Chesapeake Energy (NYSE:CHK), UNG (NYSEARCA:UNG), Chart Industries (NASDAQ:GTLS), KBR (NYSE:KBR), Exxon Mobil (NYSE:XOM)

Since nuclear energy no longer looks like a viable option in Japan and since the country was the world's largest importer of liquified natural gas [LNG], meeting 30% of the country's energy needs, a natural gas company might seem like a logical play on the disaster in Japan. However, the real story is not so simple. Until Exxon Mobil (XOM) "wakes up" and builds a large plant in the U.S. to create LNG, the domestic natural gas sector will be stuck and will continue to take second place behind coal. Natural gas companies worth buying are either takeover targets or those that have such cheap finding costs that they make significant profit, even when natural gas is low; Southwestern Energy (SWN) is Cramer's pick for the latter reason.

One natural gas play Cramer will not endorse is the United States Natural Gas ETF (UNG) which does not own any natural gas but trades futures. The ETF could actually decline on rising natural gas prices as it has to flip its contracts. The ETF is down 50% since Cramer put it on the Sell Block in November 2009, and Cramer thinks UNG should be transferred to a maximum security Sell Block.

Chart Industries (GTLS), which makes equipment for producing LNG was a great speculative play that was up an astounding 13% on Thursday. Since the stock has risen 23% in just six weeks since Cramer recommended it, he would take profits. KBR (KBR) builds LNG terminals and is responsible for half the LNG production capacity for the last 30 years. The business represents 30% of KBR's revenues, and Cramer sees multiple contracts for the company because of nuclear's setting sun, but the story is very long-term. With a multiple of 15 and a growth rate of 10%, KBR can be bought.

Keep Selling Tech: Qualcomm (NASDAQ:QCOM), Sanmina-SCI Corp (NASDAQ:SANM), Finisar (NASDAQ:FNSR)

"I just don't like tech stocks here," said Cramer, and it has little to do with Japan. When Qualcomm (QCOM) claims it doesn't see material impact from the Japanese disaster, it might be correct; things were bad for tech before the tsunami ever hit. Just a week before the catastrophe, the news of an inventory glut for tablets and Finisar's (FNSR) bad announcement wrecked the sector. Slowing demand in China added to the misery. Even if the terrible earnings shortfall reported by Sanmina-SCI Corp (SANM) are primarily related to the company's own problems, there is no compelling reason to buy tech stocks. When will Cramer be bullish on tech once again? When it can be proven that companies can blow out their earnings estimates. Until then, keep selling tech.


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