Stock to Sell
This decision isn’t as easy as it might seem. Materials stocks have experienced significant weakness at times in 2013, but the contrarian in me realizes that every worm has its turn. At some point the sector will recover, and when it does, I don’t want to be on the wrong side of that recovery.
I’m looking for an industry that’s hurting and likely to stay that way. It’s tempting to think gold — it had its day in the sun already — but the more I think about it, I see the coal industry as the big loser in the next 12-24 months as natural gas continues to grab more market share in electric power generation.
It’s not going to happen overnight, mind you. During the past year, coal regained some of the market share it has been losing to natural gas since 2007. As more power generation systems switch to natural gas, price rises due to increased demand — economics 101 stuff — and electricity producers move to coal in order to lower their costs.
It’s a temporary panacea. Once natural gas producers acquire the technology to safely drill for natural gas, the reserves in shale basins across the U.S. will supply domestic energy needs for hundreds of years. And even if they can’t, some other energy source that’s cleaner than coal will come along in the place of natural gas. It might take a century or more, but it’s going to happen.
So …which coal producer should you shun?
All of them.
As crazy as it sounds, I’m suggesting that you short the Market Vectors Coal ETF (KOL), which seeks to replicate the overall performance of the global coal industry. Not every one of the 34 holdings is a coal producer — Joy Global (JOY) is a top-10 holding — but many are, including Peabody Energy (BTU) and Alpha Natural Resources (ANR).
Since its inception in January 2008, KOL has achieved an annualized total return of −12.8%, considerably worse than the S&P 500. Despite my general belief in reversion to the mean, I believe the coal industry will continue to face much pain. In this situation, a lowering tide strands all boats. For those who actually own this ETF, I’d seriously reconsider your position.
Coal is going down — it’s only a matter of time.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.