Investors in coal should be especially pleased that 2013 is over. “The war on coal” waged by the Obama administration, along with a variety of other factors, have resulted in the sector being decimated over the last 12 months. During that period, the Standard & Poor’s 500 Index (NYSE: SPY) rose more than 30 percent. By contrast, the exchange-traded fund for coal, Market Vectors Coal (NYSE: KOL), fell more than 20 percent.
It was even worse for individual publicly traded companies in the coal industry.
Coal Stocks Were Decimated in 2013
Peabody Energy (NYSE: BTU), considered to be the blue chip in the sector, fell more than 30 percent for 2013. Over the same period, Arch Coal (NYSE: ACI), plunged almost 40 percent. James River Coal Corp. (NASDAQ: JRCC) is off close to 60 percent.
Despite this performance, Westmoreland Coal (NASDAQ: WLB) just spent around $300 million buying coal assets from Sherritt. As reported in a statement by Sherritt, “Westmoreland Coal Co. will acquire Sherritt’s operating coal mines for C$312 million in cash and the assumption of capital leases valued at C$153 million.”
Rather than the share price falling for Westmoreland Coal, as often happens in an acquisition, it jumped nearly 9 percent for the week. Over the same period, Market Vectors Coal was flat. So it was not a bullish time segment for the coal industry.
Buy Low, Sell High
For investors, that is an example of “smart money” buying into, rather than selling, coal assets. Westmoreland Coal spent hundreds of millions for coal assets. The investment community responded favorably by taking the share price higher.
That can certainly be taken as a bullish sign for investors looking to buy into a sector that has been pummeled.
The coal industry is not going out of business. It is still the most widely used fuel source in the world. In emerging markets, where the great majority of the world’s populace resides, coal is the fuel of choice. The demand for it will increase due to its ease of use.
Will This Be Enough to Make Coal a Good Investment?
Westmoreland Coal certainly thinks so, as demonstrated by its acquisition of assets from Sherritt. The market certainly approved, in the short-term. But investors should always buy for the long-term.
For those purposes, the quality of the investment is paramount.
In the coal sector, there are two ways to go. The first is with the best company. That is generally considered to be Peabody Energy. It has is a long way off from its peak. There is not much that is appealing in its financials, though, other than the price-to-sales ratio is 0.70.
That means that every dollar of sales for Peabody Energy is selling at a 30 percent discount in the stock price.
If buying a single quality stock doesn’t appeal to you, then go for diversity. For coal, that means the exchange-traded fund: Market Vectors Coal. Like Peabody Energy, it is down for 2013. But it has started to rebound, up more than 6 percent for the last six months. It has also risen over 2 percent for the last week of market action.
Through quality and diversity, investors could profit from the rebound in coal.
What are your thoughts about buying coal in 2013?
Jonathan Yates is a financial writer with degrees from Harvard, Johns Hopkins and Georgetown University Law Center. While much of his career was spent working for Members of Congress on Capitol Hill, he was also General Counsel for a publicly traded corporation; and worked in the research department of a brokerage house.