Some coal stocks may be up by triple digits over the past year, thanks to surging demand, but they are beginning to look like dying embers after investors decided to dump a large swath of commodities this summer. Even after a recent bounce, the S&P 500 coal and consumable fuel subindustry index is nearly 28 per cent below its recent peak, at the end of June.
For Shneur Gershuni, an analyst at UBS, the lower prices mean that some coal producers are looking tempting again, given his belief that the pullback has been out of line with the solid fundamentals.
"While investor funds have flowed out of the energy complex since late June - showcased by falling commodity spot prices and equity valuations - the fundamental supply/demand picture for domestic and seaborne coal markets remains strong," the analyst said in a note.
In particular, he upgraded three stocks to a "buy" recommendation from "neutral" previously, based on their compelling valuations. The names are: Arch Coal Inc., Foundation Coal Holdings Inc. and Massey Energy Co. Based on his 12-month price targets, he believes the shares could rise between 19 per cent (in the case of Massey Energy) and 35 per cent (for Arch Coal).
Paul Ausick, writing on the 24/7 Wall Street blog, is more cautious. On the upside, he said that demand for coal isn't going to evaporate, which makes any comparisons to the bursting of the dot-com bubble out of line. He noted that 50 per cent of U.S. energy needs are being met from coal-burning power plants, and demand for electricity is growing fast.
"But coal companies also have to face tightening emissions standards which make natural gas and renewables like wind and solar more attractive. Even nuclear power generation may re-enter the competitive picture," he said. Current valuations of coal companies will very likely continue to fall, but over the medium term, nothing is going to replace coal and that fact alone should keep coal burning bright."