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While many stocks have been trending up, and with some even near the 52-week highs, it's getting harder to find value in this market. However, some sectors have been facing challenges that have caused certain stocks to plunge. One of the best examples of this is the coal sector. When business is good and investors are excited, stocks tend to be bid up, even beyond fair value. Conversely, when a business faces challenges, and the headlines make it easy for investors to give up and sell, it often pushes stocks way below the intrinsic value. That might be where a number of coal stocks are at now, so it makes sense to consider a few of these oversold bargains today.

The risks and challenges:

1) Natural gas prices have plunged thanks to new shale resources and technology that has created an abundant supply. This has impacted coal prices because major utilities have the ability to switch the fuel source for their electrical power generators from coal to natural gas. The other factor that has impacted coal and natural gas is that the United States just had a very mild winter season. This lowered the demand for energy of all types since consumers and businesses had less need for heat. If weather patterns revert to seasonal norms, demand could return for both natural gas and coal.

2) Economic weakness is another concern, in particular investors are concerned that China could face a economic slow down or even a hard-landing. China is a major consumer of coal, so weak demand could put pressure on supplies in the short-term. However, in the long-term China remains promising and the economy is still expected to post growth of around 8%.

These leading coal producers have seen a sharp drop in the stock price, but that might be creating a buying opportunity for longer term investors:

Alpha Natural Resources (NYSE:ANR) shares have plunged from the 52-week high, which was close to $60 per share. This major coal producer announced it would reduce coal production by about 4 million tons by 2013. Since a number of other top coal companies are doing the same, the excess supply conditions might be sharply reduced in the next several months. This company has about $700 million in cash on the balance sheet and around $2.98 billion in debt. It also has a book value of $33.88. The stock is now trading at about half that level, which could indicate that the sell-off is overdone. Averaging into this stock over the next few months could provide significant rewards, if coal pricing and demand rebounds.

Here are some key points for ANR:

  • Current share price: $16.39
  • The 52 week range is $13.80 to $59.20
  • Earnings estimates for 2012: a loss of 45 cents per share
  • Earnings estimates for 2013: a loss of 16 cents per share
  • Annual dividend: none

Cliffs Natural Resources (NYSE:CLF) shares have been under pressure, but the stock has fared relatively well compared to many others. This strength could be due to the fact that analysts expect the company to remain solidly profitable, even during this period of weakness for coal. This company also has a solid balance sheet which will allow it to continue with a major share buy back program. This allowed it to buy around 4 million shares in 2011. Cliffs recently announced earnings of $2.63 per share for the first quarter of 2012. This easily beat analyst estimates which were just $1.10 per share. As a low cost producer of coal, and iron ore, Cliffs could continue to beat expectations.

Here are some key points for CLF:

  • Current share price: $63.54
  • The 52 week range is $47.31 to $102
  • Earnings estimates for 2012: $9.12 per share
  • Earnings estimates for 2013: $11.35 per share
  • Annual dividend: $2.50 per share which yields 3.8%

Peabody Energy Corporation (NYSE:BTU) shares now trade for less than half the 52-week high. Now, it could be time to average into this top quality coal producer, especially as this company just announced better than expected results. Peabody recently reported earnings of $172.7 million, or 63 cents a share, for the first quarter of 2012. This was down only slightly from $176.5 million, or 65 cents a share, in the first quarter of 2011. The company also said it would cut production and it guided for sales of 185 million to 195 million tons of coal in the United States this year. On April 20, 2012, analysts at Howard Weil upgraded the shares to "market outperform" and set a price target of $51 per share. That would provide gains of about 70% from current levels.

Here are some key points for BTU:

  • Current share price: $30.53
  • The 52 week range is $27.11 to $68.30
  • Earnings estimates for 2012: $2.67 per share
  • Earnings estimates for 2013: $3.62 per share
  • Annual dividend: 34 cents per share which yields 1.1%

Arch Coal, Inc. (NYSE:ACI) is another coal stock that is worth watching for signs of a bottom, or even averaging into now. These shares are trading for less than one-third of the 52-week high, and for almost half of book value, which is $16.90 per share. Even though the stock has been harshly punished by investors, the fundamentals don't seem nearly as bleak. Analysts still expect the company to remain profitable for the next couple of years, and it seems likely that the coal market will rebound within that time frame. While investors are waiting for a higher stock price, the company pays an above-average dividend yield of 4.6%. Analysts at Howard Weil recently gave Arch Coal shares a "market outperform" rating and set a $22 price target for the stock. That would provide gains of over 100% from current levels.

Here are some key points for ACI:

  • Current share price: $9.64
  • The 52 week range is $9.05 to $35.06
  • Earnings estimates for 2012: 57 cents per share
  • Earnings estimates for 2013: 75 cents per share
  • Annual dividend: 44 cents per share which yields 4.6%

Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Source: Why Some Coal Stocks Could See Gains Up To 100%