Coal Stokes Wall Street Furnaces

Old King Coal

Coal is another story. While viewed as an attractive alternative to more expensive fuels, coal has never really left the mainstream.

"Coal is the fuel of choice for 50% to 55% of the electric generation in this country," said Jon Cartwright, director of institutional research at BOSC. "That is, by no means, insignificant."

Moreover, companies are actually starting to build or expand more coal fire-powered plants when faced with running costly gas-fueled plants instead. But those companies could soon find themselves competing with international steel mills for available coal.

Credit Suisse First Boston analyst David Gagliano predicted a possible bidding war for coal as early as next year.

"In this scenario," he concluded, "the North American coal producers are poised to benefit via significant pricing improvements in their long-term coal contracts."

Late last month, Gagliano raised the price targets on every coal stock in his universe due to favorable trends in the industry. And he singled out Massey Energy (MEE Quote) for an upgrade from neutral to outperform as well.

Gagliano favors Massey because of its generous production of the "metallurgical" coal used by steel producers in booming China. But a competing analyst, Paul Forward of Legg Mason, likes Arch Coal (ACI Quote) for the opposite reason. Arch produces very little metallurgical coal and caters to domestic customers instead.

As a result, Forward believes, those who worry about a slowdown in China's sizzling economy might be better off owning Arch instead.

"We view Arch as an investment in domestic utility steam coal production that is largely insulated from China uncertainty," explained Forward, when upgrading Arch from hold to buy this month. "While our long-term preference as investors is for coal producers that are positioned to benefit from Asia's growth, we believe that the combination of China fears and very low coal stockpiles at domestic utilities may shift investors' preferences in the near term for coal producers serving domestic steam coal markets."