True to his populist base, President Donald J. Trump announced the U.S. withdrawal from the climate change accord known as the Paris Agreement. The decision came as no surprise, as the Commander-in-Chief has previously blasted unfavorable deals made by the prior Obama administration. Additionally, President Trump wants to keep his campaign promises to “coal country.” As a result, coal stocks were one of the best investments of 2016.
Unfortunately, the calendar has been nothing but cruel to the practically archaic energy sector. The Dow Jones U.S. Coal Index offers the greatest evidence of extreme volatility.
Right around the time of the oil market collapse, coal stocks nose-dived, hitting bottom in early 2016. However, the sector rebounded sharply, along with the rest of the energy and commodity markets. The coal index took home a nearly 131% gain last year.
This year, the story line has completely changed. The coal index is down 18%, while the broader markets have hit record highs. Although President Trump’s decision to withdraw from the Paris Agreement boosted the index by nearly 2%, that’s simply not enough. Coal stocks are hurting badly. They are no longer beneficiaries of a presidential election cycle, and Trump’s surprise victory. The country has essentially returned to “business as usual.”
The President did leave the door open for future climate negotiations, but we can all read between the lines. And irrespective of the ultimate course of action, coal stocks are in serious danger. Despite the fact that coal accounts for over a third of U.S. electrical energy usage, the combustion process is inefficient. Since man first learned to start a fire, combustion’s core concept hasn’t changed much.
That’s really the problem with coal stocks. The insistence of “America First” ignores the reality that times are changing. Companies like Tesla Inc (NASDAQ:TSLA) are the future. I’m not saying that coal doesn’t have a role in this country, but we have to get real. America is great (again) because we are successfully transitioning from an industrial powerhouse to an innovative one.
Economies of scale for coal production favors developing nations like India and China. America will still support coal, but on quadrennial basis. Because of that, the magic run in coal stocks has sadly come to an end.
Coal Stocks in Trouble: Market Vectors-Coal ETF (KOL)
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Eventually, KOL collected 104% in the markets, thanks in large part to a vigorous campaign cycle.
Hopefully, most of the traders that got in last year exited when the new year began. If not, they should probably consider it. While it’s true that KOL is up 3.5% year-to-date, the forecast does not look great. For one thing, KOL only bumped up less than 0.5% on President Trump’s announcement. Since the beginning of April, the fund is down more than 9%.
The markets got an early warning about potential trouble. When then-candidate Donald Trump was elected, no one would have been surprised if coal stocks had jumped higher. But for KOL, the enthusiasm lasted a few days. By the end of December, the fund dropped more than 8% against the Nov. 8 election day. That is actually a surprise, since no one was expecting Trump to pull it off.
As I mentioned previously, the markets have seemingly priced in all the enthusiasm. It’s back to business as usual, and that’s bad news for coal stocks.
Coal Stocks in Trouble: Arch Coal, Inc. Class A (ARCH)
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Between the open of Oct. 5 through the end of December, ARCH gained 11.5%.
Of course, 2017 is proving to be a different animal.
On a YTD basis, ARCH stock has lost 12%. If it continues to slide further, it’s at risk of dropping below its initial opening price at the NYSE. Although patriotic speculators are hoping for a reversal, the forecast isn’t too hot. ARCH increased by less than 1% on Trump pulling out of the Paris Agreement.
The bullish argument is that the reaffirmation of “America First” will bolster domestic coal mining operations. I used to believe in that promise. However, as time goes by, it’s becoming increasingly clear that “Rhetoric First” is the de-facto message. Even President Trump was noncommittal when he discussed the possibility of visiting the coal mines.
Such subtle statements speak volumes. Token visitations alone won’t help ARCH and coal stocks, yet apparently, the President has more important things to do. I’m not making a snide remark — Mr. Trump actually does have more important things to do.
Coal Stocks in Trouble: CNX Coal Resources LP (CNXC)
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Last year, CNXC stock raked in a 138% profit, beating out many of its competitors. More importantly, the rally helped erase the bitter and painful memories of 2015, CNX Coal’s maiden year. During that time, CNXC stock lost 39%.
Fast forward just a tad to 2017, and the picture has changed entirely. CNXC stock is down 10% YTD and its technical picture is somewhat worrisome. Granted, shares got a nice 5% lift off of Trump’s Paris Agreement decision.
However, CNXC is still down 3% against the May 2 close. In order to succeed, the company needs more than just a one-off press release. It needs constant affirmation that the administration will support coal stocks.
Again, this is where it gets problematic for CNXC and the underlying sector. President Trump waffled on a number of audacious promises, such as the outright travel ban turning into “extreme vetting.” It stands to reason that he’ll waffle on coal stocks.
The industry is also challenging long-rooted social trends. Back in 2009, The New York Times ran an editorial decrying American energy usage inefficiencies. Scientifically, acquiring energy from combustion will always have inefficiencies, and will always produce some harmful byproduct.
You can cry, you can troll, you can call Sir Isaac Newton a snowflake — physics doesn’t lie.
Coal Stocks in Trouble: Westmoreland Coal Company (WLB)
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But such rapid enthusiasm typically comes to an end, and quite badly. This is exactly the case for WLB stock. Shares dropped a heart-sinking 63% YTD. The sharp loss has erased almost all of the investment gains made last year. What’s worse, from a technical perspective, WLB does not appear to have hit bottom. Also, shares declined by 1% off of President Trump’s announcement.
Two explanations exist. WLB was always a speculative investment due to its financials. However, its recent performances are telling. Quarterly sales are down, while cost of goods sold and administrative expenses are up. That’s not the kind of disclosure you want to provide to your shareholders.
The other explanation is fundamental. Trump’s overtures to coal miners were largely ceremonial. Although the President mentioned in his announcement that he was for the “citizens of Pittsburgh,” the reality is that Pittsburgh voted for Clinton by nearly a 4:1 margin.
To lift coal stocks, the Commander-in-Chief would have to overhaul both infrastructure and societal trends. That’s just not going to happen.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
