Time to Buy Coal?

Sterne Agee is out with a morning note, declaring the coal sector to be oversold. They cite the EPA risks, limiting the prospect of new coal fired plants, as not relevant at the moment, since capacity at existing plants is at around 60-70%. Those are valid points, at least in the near term.

Balance sheets are horrendous, but most coal companies have adequate funding for the foreseeable future. What this comes down to, frankly, is traditional supply/demand metrics and right now natural gas is too cheap to get excited about coal. While it’s true that coal has regained market share at the utilities, every single month since the April lows, it’s also true that 60% capacity is hardly inspiring from an investors viewpoint.

When investing in semiconductors, you want capacity upwards of 90%, in order to reliably predict margin expansion. At 60%, the risk is margin compression.

Here are some one month returns for the coal industry. Keep in mind many of these stocks ran white hot in the month of October.

OXF -51%
JRCC -37%
WLT -20%
ACI -20%
ANR -19.5%
BTU -12%
CNX -9%

Botton Line: I’d avoid buying into this dip. Typically the month of January is a wretched one for coal, whereas February and March are great times to own it–sporting 75% success rates. Be patient and let the blood flow freely. The carnage is far from over. It gets worse before it gets better.

http://www.youtube.com/watch?v=qg48ZZ2wYfM