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3 Ways to Profit from Coal's Eventual Rebound

Stocks in this article: KOL BP CAT XOM BTU BHP

There are three ways for investors to profit from the recovery in the coal sector over the long term.

Market Vectors Coal has a lot going for it as a play on coal. It holds a wide range of assets. That protects shareholders from a single company collapsing, which is a distinct possibility in the coal industry. As shown by its high in June 2008, it has tremendous upside. Individual producers may go bankrupt, but the entire coal industry is not going out of business.

As for stocks in the coal sector, there was a very positive article on Peabody Energy in Barron's last August. In November, Goldman Sachs issued a bullish report on Peabody Energy with a target price of $26 a share by May 2014. The article in Barron's concluded that, "In sum, with low-cost domestic and international operations, Peabody could energize the portfolios of patient investors."

That is the best way to look at Peabody Energy. Rather than rising by 30% as predicted by Goldman Sachs when it was trading around $20 a share in early November last year, Peabody has fallen almost 25%.

The third way to gain from the rebound in coal is buying shares of companies that will benefit from increased activity in coal, but have other lines of business to compensate for weakness in the sector. Caterpillar is an obvious choice. Another is BHP Billiton (BHP), the world's largest natural resources company.

Both have above average dividend yields. (Caterpillar at 2.60%, BHP Billiton at 3.76%.) Shareholders are not stuck holding a "dead money" investment while patiently waiting for the coal business to recover.

China is starting to grow again with record import and export activities for 2014 as reported by its Custom Administration. That should increase the demand from both the world's largest consumer of coal and the world's biggest trading partner. If the Keystone Pipeline does start to export natural gas from North America, the price should rise due to greater demand. That will also make coal more attractive again to utilities and others.

The coal industry is not going out of business. Over the long term, investors can mine some major profits.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jonathan Yates has written for numerous publications including Newsweek and The Washington Post. He is a former general counsel for a publicly traded corporation. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate. He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.
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