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Mining for Coal Winners

This column was originally published on RealMoney on April 2 at 10:30 a.m. EDT. It's being republished as a bonus for readers. For more information about subscribing to RealMoney, please click here .

Alternative energy. It's the hottest topic of conversation in Washington, at your office water cooler and with the talking heads on radio and TV.

Alternative shmalternative! The possibility of putting some of these new technologies into real-world practice is so far from realization that I sometimes wonder what the rest of the world is thinking.

Sure, some of these new sciences have very strong support from some very well-heeled companies, particularly fuel-cell technology from United Technologies (UTX), Mitsubishi and Toyota (TM). And despite the economic silliness of it all, it seems that, as a nation, we are ready to go "all in" for ethanol.

But some of the others I hear about don't look quite ready for prime time at all. I mean, power from leftover McDonald's (MCD) vats of French-fry oil, power from pig excrement, biofuels, geothermal power? Let's get real.

Instead, let's look at coal. We have the technology to get it out of the ground in tons; it burns easily and doesn't cost a whole lot. If it was good enough for the 19th century, it's good enough for us, right?

Apparently it isn't. Coal is filthy. It has a long history of killing those who mine it and destroying our atmosphere when burning it. It has definitely become the black sheep of energy sources in the U.S. But just when we're willing to consider so many weird sources of alternative energy, it may just be the right time to take a fresh look at coal and how to make it work for the 21st century.

I'm not a coal analyst. I'm a commodity trader. But with oil staring at $70 a barrel and growth figures for China and India still looking robust, it seems to me there will be a lot of interest in any alternative to crude oil, especially one that is usable now -- namely, coal.

Emerging nations will be less strict about the polluting nature of their energy sources. And, to be fair, real inroads have been made in cleaning up the worst coal firing systems over the past few years, using scrubbers and CO2 storage technology.

The one company that has emerged on top of those efforts, Fuel-Tech (FTEK), seems like a play that you either caught last year if you were smart, or should forget about. The stock has increased 2½ times since last August and has become a darling, incredibly overpriced stock that you should probably avoid at this point.

So let's try to pick some coal winners.

Let's start with the big-cap names that everybody knows in the sector: Peabody Energy (BTU) and Consol Energy (CNX). Both have terrific balance sheets and sport reasonable multiples. I love the fact that Peabody has expanded so aggressively into China, and Consol has an integrated business plan on coal that uses the commodity from vein to smokestack. These are quality companies, but are expensive right now.

Peabody Energy, Daily
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Consol Energy, Daily
Click here for larger image.

With both charts bouncing off the tops of their respective 20-day Bollinger bands and crossing stochastic lines that have run over 80%, I'd wait before buying them here. I would instead look to buy Peabody between $38 and $39 and Consol on a healthy dip down to between $36 and $37. If you really believe in coal, however, these become very long-term trades in which you could catch healthy returns of 50% or more.

But for getting coal exposure, I really like the coal limited partnerships, particularly Alliance Resource Partners (ARLP), which I own, and Natural Resource Partners (NRP). These LPs have coal-mine assets that they lease to subcontracting mining companies for the long term. The business income remains very stable over a long period, while still offering strong growth opportunities. These partnerships will also benefit from commodity cost and demand increases, though perhaps not as much as pure coal companies like Peabody and Consol.

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