4 Stocks to Play Coal’s Short-Term Comeback

by Susan J. Aluise | July 2, 2013 1:35 pm

Coal stocks took it on the chin last week, thanks in part to President Barack Obama’s blistering climate change speech.

Although the Obama administration’s clean energy priorities have never been coal-friendly, last week’s new climate-change plan ups the ante significantly. New restrictions on carbon emissions from power plants, which Obama can affect by executive fiat, would shutter many existing coal-fired energy plants.

The plan has come under fire not only from Congressional Republicans, but from coal-state Democrats like West Virginia Sen. Joe Manchin. He echoed the sentiment that it’s tantamount to a “war on coal,” although Energy Secretary Ernest Moniz has disputed that characterization[1].

Obama’s climate-change agenda also could derail plans for the Keystone XL pipeline[2], as it conditions approval of the Texas-to-Canada project on proof that it doesn’t “significantly increase” CO2 emissions.

But while King Coal’s long-term prognosis in the U.S. is grim, short-term investment opportunities remain … although not among shares of coal producers.

See, coal recently has been experiencing a renaissance in the power-generation sector thanks to a doubling of natural gas prices. While dirt cheap shale gas had provided strong incentives for power generating plants to kick the coal habit in favor of the cheaper, cleaner-burning fuel, coal becomes a more cost-effective alternative for electricity generation as natural gas prices rise.

Although it’s only a matter of time before King Coal has to abdicate his throne for good in the U.S., two types of companies stand to benefit from cheap and abundant coal in the short term: energy producers that rely on it for electricity generation and the freight railroads who transport that coal.

With that in mind, here are four stocks — none of them coal producers — set to realize near-term gains from its (perhaps short-lived) revival:

Duke Energy

Despite its strong nuclear and natural gas portfolios, Duke Energy (NYSE:DUK[3]) has not abandoned coal; it has 19 coal-fired plants and sees coal as a continued part of its future energy production plans. The company’s coal strategy is being advanced in two ways: with an 825-megawatt clean coal plant in North Carolina and a project in Indiana for a 618-megawatt plant that turns coal into a synthetic gas.

DUK shares have slipped about 11% since their 52-week high in May, possibly making for a good entry point. You can play coal’s revival while enjoying the utility’s hefty 4.6% dividend.

American Electric Power

Despite the fact that it will close three coal-fired plants by 2015, American Electric Power (AEP[4]) continues to be one of the nation’s largest coal users. As natural gas prices have risen over the past year, American has increased capacity at its coal-fired plants and lowered generating capacity at its natural-gas facilities.

Sure, AEP is likely to opt for natural gas for future construction since it is less expensive for new builds. But in the meantime, existing power generation facilities are less expensive if coal-powered.

Like Duke Energy, American Electric shares have slipped about 14% since their 52-week high in May but offer a similarly appealing payout, yielding north of 4%.

Union Pacific

Coal has long been a key component of Union Pacific’s (UNP[5]) transport volume, which has been a rising concern for investors given recent volume declines. Higher natural gas prices, however, have boosted those volumes as utilities have increased their coal levels to keep power generation costs low.

The cloud of uncertainty over the Keystone XL pipeline also may raise the railroad’s fortunes — after all, if there is no pipeline, freight railroads will have to continue to move fossil fuels. As a result, the railroad’s petroleum product volumes will continue to wax, even as coal volumes wane.

Union Pacific shares are trading near their 52-week high, yet don’t look overbought. The stock’s price/earnings-to-growth ratio of 1.1 is about right for the sector.

Norfolk Southern

Norfolk Southern (NSC[6]) also has heavy volume business in coal transport, particularly to power-generating utilities in the Southeast that can only accept coal deliveries via railroad or barge. NSC also is developing a strong position in the fast-growing intermodal transport segment, while scrap metal and chemical shipments also continue to grow.

NSC is trading about 10% below its 52-week high, and its PEG ratio is in line with the industry. Plus, Norfolk Southern pays a current dividend yield of 2.8%.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

  1. has disputed that characterization: http://www.guardian.co.uk/environment/2013/jul/01/barack-obama-climate-change-carbon-emissions-coal
  2. plans for the Keystone XL pipeline: http://www.latimes.com/news/politics/la-pn-obama-test-keystone-xl-pipeline-20130625,0,2461643.story
  3. DUK: http://studio-5.financialcontent.com/investplace/quote?Symbol=DUK
  4. AEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AEP
  5. UNP: http://UNP
  6. NSC: http://studio-5.financialcontent.com/investplace/quote?Symbol=NSC

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