After the shellacking that coal stocks have experienced over the last few years, Morgan Stanley’s recent upgrade of coal kingpin Peabody (BTU) is a very welcome sign. Its beleaguered and downtrodden investors managed to send shares of BTU up around 5% on the news. Likewise, shares of coal stock rivals — Alpha Natural (ANR) and Arch Coal (ACI) — also rallied.
But the recent upgrade is only the latest piece of bullish news for the coal sector.
After falling around 20% in both 2012 and 2013, the broad-based sector measure — the Market Vectors Coal ETF (KOL) — has gained almost 8% since early February. That move has prompted several investors and analysts to believe that bottom for the sector is finally in and more gains could be in store.
I’m not so sure.
While the medium term is certainly singing coals praises, the longer term is just as rocky. So is the rise in coal stocks actually for real? It just depends on your timeline.
A Bullish Set of Factors for Coal Stocks
James River Coal’s (JRCCQ) bankruptcy filing aside, it has actually been a good couple of months for coal stocks. The vast majority have moved upwards from their lows. The bulk of those gains could be tied to rising natural gas prices.
As the cold and snowy winter gripped the United States during the first quarter, the country began to seriously deplete natural gas inventories. As such, prices for the fuel began to rise and recently touched the $6 per MMBtu mark. While still substantially less than records, that high price for natural gas does clip some of its appeal from utility standpoint. Many utilities have been making the switch to natural gas from coal as prices for the fuel remain low.
With coal prices now trading for less than natural gas, there’s less incentive for an electricity provider to make the switch. Add in the steadily rising growth in the U.S. economy, and coal miners look like they’re in the driving seat when it comes to providing some big returns in the months ahead.
Morgan Stanley’s upgrade of BTU highlights these points. Analyst Evan Kurtz predicts that the U.S. will burn around 63 megatons this year, while inventories of the fuel — due to mine closures since 2012 — will fall to “near historic lows” and see a modest price recovery throughout the year.
The Rub for Coal Stocks
So with the potential for higher coal prices and earnings on the horizon, the time to bet heavily on the coal stocks could be at hand, right?
Well … it’s not that easy.