Old King Coal is hardly a merry old soul these days. Coal stocks have been in a tailspin as domestic power plants switch to cheap and abundant natural gas, the EPA cracks down on emissions and the coal industry in general continues to be synonymous with climate change around the world.
Coal prices have crashed, and as a result coal giant Peabody Energy (BTU) is down almost 80% year-to-date, with other large coal stocks Consol Energy (CNX), Cloud Peak (CLD) and Alliance Resource Partners (ARLP) down about 40% to 50% since January.
Smaller companies like Arch Coal (ACI) and Alpha Natural Resources (ANR) are both down 80%, too, though it’s worth noting they both trade for less than 30 cents and have market caps of less than $50 million so volatility and big risks can always be expected in stocks this size.
So will it ever get better for coal stocks?
The short answer: Not bloody likely.
Click to EnlargeFor starters, the political will against coal is pretty big right now. Bloomberg has a great map of the coal power plants closing in America across the next five years or so — a large number of which are converting to natural gas.
Also, as a commodity priced in dollars, coal prices will remain soft as the greenback remains the world’s dominant currency. With turmoil in Greece, a China slowdown and both the EU and Japan easing respective central bank policies to boost their economies, the dollar has been at or near 12-year highs vs. other currencies for months.
And worst of all, investors have been burned on coal stocks for years so the sentiment is so bad it will take a huge change for picks like BTU, CNX and ARLP to break out of their death spiral. As Aaron Levitt recently wrote on InvestorPlace, the multi-year trend of a fracking boom to release cheap natural gas combined with draconian regulations and a China slowdown has added up to a no-win situation for coal.
Bottom Line for Coal Stocks
Speculating in these dogs is a bad idea, because you’re fighting some mammoth megatrends. Even if you think a GOP wave in the next election will undo regulations, what about the problems of a slowing China and a strong dollar? What about the pricing power of cheaper (and cleaner) natural gas vs. coal?
There is little chance this will resolve in favor of coal stocks. So while there may be the occasional swing trade on volatility for the savviest of traders — particularly in ACI and ANR that are effectively penny stocks, subject to sentiment and market whims more than any facts or fundamentals — 99% of investors should avoid coal stocks at all costs.
Because even though it has been quite bad for King Coal and the negativity is priced in, it still could get a lot worse.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
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