With oil prices consistently staying above the $60 level and gas prices rising due to refining capacity, coal prices have once again begun to rise after a six-month slide.
Prices have remained firm as the worldwide demand for energy continues to increase. The demand for oil is closely linked to the demand for other energy sources, like coal. When there is increased demand for energy, it typically impacts all areas of energy, coal included.
September Coal Futures
You can see this in the chart of coal prices, which have been steadily rising for the past few weeks. This is representative of the overall strength in the energy companies across all sectors of the business: drilling, refining, natural gas and equipment. The two are related, and when the oil stocks are strong, it tends to keep the coal stocks strong and drags them along for the ride.
We believe this trend most likely will continue, and that if you believe in the energy theme, having some representative coal stocks in the portfolio is a prudent idea. These stocks have been improving, and the recent weakness should represent a good buying opportunity.
Another positive force in this sector is the potential consolidation. Just as we have seen in other basic-materials sectors, such as the copper producers and steel manufacturers, the potential for consolidation in this space is high.
We also can find supporting evidence for coal stocks in the rail sector's strength. About 20% of railroad revenue is coming from coal shipments. If these stocks are doing well, which they are, it's safe to assume coal shipments remain firm.
We have highlighted
as two names in this space.
Arch Coal is one of the larger players in the coal business, and most likely an acquirer in any consolidation in this space. This stock has recently completed a lengthy basing process. That occurred after a strong advance and is healthy price action as a sign of long-term strength.
We would use the current weakness to accumulate shares of ACI. The pullback appears to be related to profit-taking after a sizable short-term rally. We believe this stock can rally back to the previous highs around the $42 level, with further upside potential to $50.
CNX has been a more resilient name in this space. The stock has had a strong advance and is holding on to those gains. We would be a buyer at current levels or on any pullback to the $44 level. The biggest risk to these stocks is any significant weakness in energy prices. Oil under $60, as a benchmark, also would act as a drag on coal prices and coal stocks.
At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.