Coal: Oversold?

Will Coal Come Back?

At The OptionWiz, we combine stock selection with option strategies to make you money. Our investment decisions are derived through fundamental and technical analysis.

We look at all types of strategies during our process. One scenario that we like to exploit is when a sector or specific stock is oversold.

Over the past year, the coal sector has fallen out of bed, and we believe there is potential for a turnaround.

At what point do we acknowledge the fact that coal still plays a large role in providing energy, worldwide?

• Coal fuels over 40% of electricity worldwide.
• Global steel production is dependent on coal-almost 70% of the steel produced today uses coal.
• Coal is an important source of the energy required to produce cement. (1)

We know it is bad for the environment, dangerous to extract, extremely out-of-favor, and our current administration wants to do away with it.

However, the world still needs coal!

The five largest coal users- China, USA, India, Russia and Japan – account for 77% of the total global consumption. Meaning, a China slowdown would be bad for the industry, but isn’t that already baked in?

While this natural resource is used across several industries (paper manufacturers, chemical companies, consumer products, etc.) demand is driven by:

• Steam Coal (thermal coal) which is used for power generation.
• Coking coal (metallurgical coal) which is used for steel production.

We are aware that there are several coal alternatives which are cheaper and better for the environment.

..But Rome was not built in a day!

Natural Gas, Nuclear Energy, Wind, hydroelectric, etc. are all brilliant forms of energy, but Coal is still driving the bus, and there is a value disconnect.

The Government is doing its part to move away from our dependence on coal.

Last week’s news of an effort by the Environmental Protection Agency to impose limits on Carbon emissions, potentially putting an end to new construction of coal-fired plants added pressure to the group.

So is now the time to go long coal?

Nobody wants to catch a falling knife and attempting to market-time the bottom is a dangerous game. However, if you believe that coal will continue to power the world for the foreseeable future, then it might be worth dipping your toe in the water.

Below are a few names to look at in the Coal space.
BTU, ANR, ACI, JRCC, PCX, CNX and KOL

*Our hedge fund owns a position in Arch Coal
(1) World Coal Association