This is a simple take on these two stocks. Patriot Coal (PCX) has short term bankruptcy risk. If bankruptcy happens the shares lose all their value and won't participate in a coal market recovery. James River Coal (JRCC), though high risk, is really much less risky short term than Patriot Coal so it offers a better way to survive the current coal market malaise with a chance to participate in the following recovery.
From the past market behavior of Patriot Coal and James River Coal, we can infer that if these equities survive the current coal slump, they both have similar upside potential.
Patriot Coal is running a considerable working capital deficit and will go bankrupt if it can't line up financing. This can happen in a matter of months.
On the other hand, James River has no such problem and is sitting on a considerable amount of cash (around $200 million between cash and restricted cash, as of March 31 2012). James River can probably survive for more than one year in a bad coal market.
This much could already be gleamed from the alternate Altman Z-score analysis I did in a prior article. While Patriot Coal came in with a -0.23 score, clearly in the distress zone, James River managed a 1.35 score, in the "doubtful" zone (see "James River Coal, Back Before It Went Bust And Now"). James River's score is comparable to Arch Coal (ACI) or Alpha Natural Resources (ANR).
While Patriot Coal's risk of short term bankruptcy is much higher than James River Coal, its upside is similar. It is thus a no-brainer to switch from Patriot Coal to James River Coal (sell existing positions in Patriot Coal and buy James River). Such trade will allow the investor more staying power to wait for coal's recovery while not sacrificing any upside potential.
The only downside could happen in the short term if Patriot Coal lines up financing, a situation where it would temporarily outperform James River.
Disclosure: I am long JRCC, ANR, ACI.