Which Coal Stock Is a Buy?

NEW YORK ( TheStreet) -- Although coal stocks come with their set of vulnerabilities, many analysts maintain a buy rating for stocks such as Peabody Energy ( BTU ), Alpha Natural Resources ( ANR ), James River Coal ( JRCC ) and Arch Coal ( ACI ).

BMO Research indicated in an investor note that Alpha Natural is in its top 15 base metals and bulk miners stock picks. "A mixture of metallurgical and thermal exposure with reasonable valuation for a high quality name," is how it was described. "High margins, good management team, and strong balance sheet."

"More positive investors could opt to increase exposure to copper and met coal-related equities, as tight markets are forecast to result in higher prices," BMO Capital Markets analyst Meredith Bandy said in an October client note.

Meanwhile, Mathew Christy, coal industry equity analyst at Standard & Poor's Equity Research, said that Peabody is probably one of the better coal stocks due to its overall size and direct exposure to some of the higher-growth international markets.

He named Arch Coal as a buy, pointing out that it has added significant scale by expanding its Powder River Basin operations. That also enables them to reduce their overall cost, he said.

Christy also included James River on his buy list. He said the stock is being underestimated by the market and could go higher. In an analyst note, Morningstar's Michael Tian said Morningstar wasn't worried about the financial health of the miner for the immediate future; he said James River would probably produce decent free cash flows this and next year.

Standard & Poor's Christy wrote in a sector outlook report that S&P's fundamental 12-month outlook for the coal and consumable fuels sub-industry is neutral. S&P's outlook assumes that demand for coal will rise in 2010, as thermal coal inventories fall on greater electricity demand and hardly any fuel switching, accompanied by stronger demand in the seaborne and metallurgical coal markets.