3 Reasons Why Coal Stocks Are Oversold And Due To Rebound

by: Trade In Mexico

The coal sector has been decimated in the past couple of months and many stocks have recently hit new lows. Coal stocks have become one of the most oversold sectors in the market today. There has been an almost perfect storm of issues facing the coal industry and the stocks were due for a decline based on oversupply, but the drop may have gone too far. A Barclays Capital analyst thinks many coal stocks are due for a rebound and with a number of fundamentally strong companies near record lows, it makes sense to consider the rebound potential now. Here are the issues that have pushed the coal stocks to recent lows and reasons why these concerns might only be short-term in nature:

1) Coal companies have suffered from an oversupply in the market. This has pushed down prices and profit margins for the entire sector. However, a number of major coal producers have already responded to the glut of coal by cutting production and shutting down mines. This could help to improve the oversupply and boost prices in the future.

2) China is a major consumer of coal and many investors are concerned that it will see a major economic slow down. Even if the economy in China is slowing, it's important to realize that instead of growing at about 11%, it might only grow at 8%. Plus, with growth slowing and oil and other commodities declining, China is likely to cut rates without fears of raising inflation. A rate cut could boost economic activity and coal consumption in the future.

3) A much warmer than expected Winter reduced the need for heat across the U.S. and that helped push down demand for natural gas and coal. The unusual seasonal warmth could have been a one-time event and if normal weather patterns resume, demand will rebound for coal next Winter.

Here are some coal stock picks that investors should cautiously consider buying on dips for a potential rebound:

Alpha Natural Resources (ANR) is a leading producer of coal. This company is responding to the glut of coal supplies by cutting production. The company estimates it will reduce annual coal production with these cuts by about 4 million tons by 2013. While most analysts are not expecting strong financial results anytime soon, the sell-off might be over done. These shares are trading for about a quarter of the 52-week high and for about half of book value, which is $33.88.

Key Data Points From Yahoo Finance:
52-Week Range: $13.85 to $59.20
Dividend: none
2012 Earnings Estimate: a loss of 32 cents per share
2013 Earnings Estimate: 8 cents per share
P/E Ratio: n/a due to loss estimates

Cliffs Natural Resources (CLF) is a top producer of iron ore and coal. This company is a low cost producer and it has the financial resources to ride out the challenges facing the coal industry. Cliffs reported earnings of $11.48 per share for 2011, and even with lower coal prices, the company is expected to remain solidly profitable in 2012. Cliffs has been buying back its own stock and it purchased about 4 million shares in 2011. It has the ability to buy more shares in 2012 as it has about $522 million in cash and an untapped $1.75 billion revolving credit line. This stock looks very undervalued when considering that the price to earnings multiple is just about 6 times earnings.

Key Data Points From Yahoo Finance:
52-Week Range: $47.31 to $102.00
Dividend: $2.50 per share which yields 3.7%
2012 Earnings Estimate: $9.88 per share
2013 Earnings Estimate: $11.92 per share
P/E Ratio: about 6.5 times earnings

Peabody Energy Corporation (BTU) is another major producer of coal. Even though earnings estimates have been drastically reduced for Peabody and other coal companies, analysts still expect this company to remain solidly profitable in 2012 and 2013. Peabody reported revenues of almost $8 billion and earnings of $3.76 per share for 2011. The shares recently hit a 52-week low, so it makes sense to only consider buying small amounts over time, because it could continue to be weak. It might be awhile before the coal industry sees a full recovery, however, with this stock trading for less than half of the 52-week high, patient investors could be getting a bargain.

Key Data Points From Yahoo Finance:
52-Week Range: $27.11 to $68.30
Dividend: 34 cents per share which yields 1.2%
2012 Earnings Estimate: $2.80 per share
2013 Earnings Estimate: $4.20 per share
P/E Ratio: about 10 times earnings

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.