Four Coal Stocks For 2012

To say 2011 has been unkind to coal stocks, is to put things mildly. As measured by the Market Vectors Coal ETF KOL, the largest of the two ETFs devoted to coal stocks, has plunged 30% year-to-date. Part of the that slack performance can be tied to concerns that the global economy is slowing, which in turns spells bad news for a high-beta sector like coal. In that vein, another reason coal stocks have struggled is that producers rely heavily on emerging markets demand to stoke profits and revenue. If emerging economies are believed to be slowing, then few investors are going to run to coal stocks. Ultimately, what's happened to coal stocks is the same train wreck that has impacted scores of other sectors: Europe's sovereign debt crisis. In other words, we're living in an environment where headlines often trump fundamentals and the fundamentals for the coal sector are arguably not as bleak as the stock prices reflect. With that let's have a look at some compelling values in the coal sector for 2012. As a note, we've intentionally strayed from some of the largest coal names, including BHP Billiton BHP and Peabody Energy BTU, on the premise that many investors are already familiar with those stories. In alphabetical order... Alpha Natural Resources ANR: Alpha Natural Resources has one of the ugliest charts in the coal sector. That's a fact. Also a fact is that stock's performance has been so grim this year that some big-name pros, including John Paulson, have thrown in the towel on the stock. In April, this was a $60 stock. It will be lucky to close above $21 by the time November ends. Problems with the Massey Energy acquisition have plagued ANR, but the company is trying to right that ship and the deal has made ANR the largest U.S. maker of metallurgical coal. That's the coal grade prized by Asian steelmakers. At a price/book ratio of just 0.56 with a low price tag, ANR is kind of like a no-expiration call option on a coal sector rebound. Arch Coal ACI: Lay ANR's chart over Arch's and you'd be hard-pressed to tell the difference. It's like choosing between awful and terrible. Trading at less than 5.5 earnings, Arch had a a gross margin of 25.12% and an operating margin of 11.58%. The stock also currently yields about 3%, which is pretty good among the coal group. Arch's Powder River Basin exposure could be a boon going forward and if analyst price targets prove accurate, the stock is a steal at less than $15. The last three price targets published on Arch are $29, $28 and $34. Call the average of that $30 and Arch might be a double. Cloud Peak Energy CLD: Cloud Peak is trading at just 8.9 times forward earnings, so it's fair to say this coal play is edging toward “cheap” status. Also in Cloud Peak's favor is the fact that the company already has over 92 million tons on contract, the equivalent of its first 9 months in 2011, according to Stock Croc. The stock has held better than many of its larger rivals this year and if all the aforementioned points aren't enough to entice you, consider this: Cloud Peak is often kicked around as a legitimate takeover target. Walter Energy WLT: We're not going out on a limb here by saying Walter is a takeover target. The investment community knows that because the rumor has been in the news for months now. Based on the price ANR paid for Massey, Walter shareholder Audley Capital Advisors said in July that Walter could be worth $240 a share. That's almost quadruple where the stock closed on Nov. 29th. Even the $120 a share British mining giant Anglo American was rumored to be considering for Walter in September looks good today. For those looking to build a portfolio of 2012 takeover candidates, Walter should be on the list. Bull case: The global economy rebounds. Emerging markets are prized once again. The coal sector continues to consolidate. On that note, ANR, CLD and WLT have all been rumored to be possible targets. Bear case: The high-beta trade remains imperiled and coal demand softens. We view the former as more likely than the latter.