Today we’ll talk about the best coal stocks to buy now. These stocks are deeply overlooked as a result of the green energy phenomenon and the anti-carbon establishment. That makes them very inexpensive now.
For some reason, people hate coal companies even more than oil and gas companies. Except of course if you are from Ohio and the Appalachia area, as I am.
Many of these companies also pay dividends, which may make them ideal for value investors. The income helps investors in these stocks wait until their value emerges.
Value investors love these kinds of stocks, not only because they are contrarian in nature but because their price-to-assets values are very cheap.
Let’s dive in and look at these stocks.
|ARLP||Alliance Resource Partners||$19.98|
|HCC||Warrior Met Coal||$28.61|
Alliance Resource Partners (ARLP)
Alliance Resource Partners (NASDAQ:ARLP) is one of the largest U.S. coal producers, with $2.3 billion in forecast revenue for 2022 and also profits of $3.78 per share. Its clients are mostly U.S. utilities that generate electricity.
Based in Tulsa, OK, it operates seven underground coal mines in six states in the mid-west and mid-Atlantic. It has 547.1 million tons of coal mineral reserves, and 1.17 billion tons of measured, indicated, and inferred coal minerals.
The stock is very cheap since this industry is not popular with green-oriented investors. For example, it trades on a forward P/E of just 5.3x for 2022 and 4.4x for 2023. In addition, it pays a 90-cents-per-annum dividend with a 4.5% dividend yield at a price of $19.98 at the close on July 11.
However, its net debt is $320 million, which is high compared to its net free cash flow of about $120 million annually. The problem is the dividend costs about this amount so its net debt reduction has been proceeding slowly.
Arch Resources (ARCH)
Arch Resources (NYSE:ARCH) makes thermal and metallurgical coal from surface and underground mines. Investors in the stock are especially interested in it, as it trades for under 2x earnings forecast for this year, according to Seeking Alpha.
Moreover, one analyst in Seeking Alpha points out that ARCH stock trades at just 2x free cash flow. He says that coal prices are forecast to stay very high. That could make it cheap for next year as well.
This analyst also points out two recent catalysts. First, the company recently bought back its convertible securities for $130 million, which will reduce its diluted share count. Second, the company will likely be in a good net cash position by the end of Q2. The analyst projects that this will lead to capital return catalysts for the stock. That could include a higher dividend or buybacks.
Right now the stock has low 0.7% dividend yield. But since the stock trades so cheaply, any slight increase in the dividend payout could dramatically increase the dividend yield.
These factors make this one of the best coal stocks on this list.
CONSOL Energy (CEIX)
CONSOL Energy (NYSE:CEIX) is a Pennsylvania-based thermal coal mining company that is very cheap but does not yet pay a dividend.
However, that may change in the next year or so, at least according to one analyst at Seeking Alpha. He projects that the company will produce so much cash flow in the next 24 months that it will equal its own market cap of over $1.5 billion. He argues that the company will be in a net cash position by then. Moreover, it will be able to pay out a dividend by then.
Meanwhile, the stock is still very cheap at just 5.8x earnings forecast for this year. In addition, the average of two analysts is that the company will make $23.27 per share in 2023, mainly from the growth in exports. That will lower its P/E to just over 2.2x.
The reason for the jump in earnings is that the company made losses in trying to hedge coal prices. If it stops those losses (by not hedging) its underlying positive earnings and free cash flow (FCF) will come through.
Investors should watch this company as one of the best coal stocks going forward.
Peabody Energy (BTU)
Peabody Energy (NYSE:BTU) is another very large U.S. coal company with operations in a number of countries, including Japan, Taiwan, Australia, India, Indonesia, China, Vietnam and South Korea.
The stock is very cheap, trading at just 2.2x forecast earnings this year. If coal prices stay elevated, as they are now, the underlying positive earnings and free cash flow (FCF) will likely push the stock higher.
One analyst projects that the company will generate $1.7 billion in free cash flow (FCF) this year. That puts its valuation, at $2.7 billion at just 1.6x its FCF, or an FCF yield of 62.9%. That is incredibly high. Most attractive value stocks might have an FCF yield of no more than 8% to 10%.
This means that there is a good likelihood that the company could end up revising its capital return policy and eventually start paying a dividend. That will act as a major catalyst for the stock.
Warrior Met Coal (HCC)
Warrior Met Coal (NYSE:HCC) is an Alabama-based metalurgical-coal (i.e., the coal is used to make steel) producer that has two highly productive mines in Alabama. Its production capacity is more than 7 million metric tons of coal.
Like the others, this stock is now very cheap and it pays a dividend. Analysts forecast earnings of $13.19 per share this year. So, at $28.77, it is trading at just 2.18x earnings. That is incredibly cheap, though that may be investors pricing in a pullback to earnings of $5.28 next year.
Moreover, this past quarter the company produced almost $60 million in FCF. That works out to $240 million annually and puts the stock on a P/FCF multiple of just 5.83x. That is very cheap if you look at it from an FCF yield standpoint (i.e., the inverse). This ratio is the same as a 17.1% FCF yield, which is more than twice the normal highest FCF yield that any kind of value stock would be trading.
Therefore, this implies there is a good possibility the company could raise its dividend going forward. Right now the dividend per share is just 24 cents. That gives the stock a paltry dividend yield of 0.8%. Expect to see this yield rise later this year with a higher payout ratio that could act as a catalyst for HCC stock.
Glencore Plc (GLNCY)
Glencore PLC (OTCMKTS:GLNCY) is one of Australia’s largest coal producers, with mining activities with other minerals and commodities as well. Nevertheless, the stock is very cheap and trades like the other coal stocks in terms of its valuation.
The underlying stock trades on the London Stock Exchange exchange under the symbol GLEN.L. But its ADR (American Depository Receipt) here (GLNCY) — where two ordinary shares are in an ADR — traded for $10.08 per share as of the close on July 11. Given that analysts expect $2.96 in earnings per ADR this year, the stock is at a forward P/E multiple of just 3.4x.
Moreover, the dividend, at 26 cents per share, gives the stock a dividend yield of 2.5%. That is very cheap for a company that has the ability to more than double the dividend if earnings continue to be as strong as they have been. That makes this one of the best coal stocks on this list as well.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.