Coal, Peabody Energy Are Bullish in the Long Term -- Here's Why

NEW YORK (TheStreet) -- The coal sector has taken a beating. Market Vectors Coal (KOL), the main coal exchange traded fund, and Peabody Energy (BTU), the largest publicly traded coal company, are down nearly 5% and 15% respectively for 2014. That is after a barrage of bearish news, ranging from the "war on coal" waged by the Obama Administration to Stanford University divesting from the industry.

Three recent developments, however, should have investors taking a long-term bullish position on coal securities.

First, coal continues to be a very attractive energy source based on price.

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Oil and natural gas have surged in price. United States Oil (USO), the main ETF for oil, is up more than 10% for 2014. United States Natural Gas (UNG), the main ETF for natural gas, has risen around 18% for the same period.

As detailed in a previous article on TheStreet, oil appears to be at a permanently high price due to its new role as a safe-haven asset. The more expensive oil and natural gas are, the more alluring coal is a fuel.

Second, the big money is betting big on a commodities boom. That's bullish for coal.

A recent article in The Wall Street Journal reported that hedge funds and private equity groups are starting to buy up assets in the shipping sector. This is transpiring due to an expectation of more demand for shipping to transport commodities such as copper and coal.

That means one thing: China is buying.

China is the world's largest consumer of coal, by far. Any growth in China that results in more consumption of any industrial commodity is very positive for coal.

Third, there is an optimistic outlook from Wall Street for Caterpillar (CAT) and Joy Global (JOY), two heavy equipment companies with extensive operations in the coal industry. That too is bullish for coal.

Joy Global received a bullish recommendation by RBC Capital Markets on June 6, raising the target price from $62 to $67. The stock has jumped nearly 7% in the last month. Caterpillar is up 5% for the same period. More than 60% of Joy's sales are coal-related. Caterpillar is the largest maker of mining equipment in the world.

So how can investors take part?

As the chart below shows, there are three basic ways to invest in the coal sector. Market Vectors Coal allows for a deep and wide exposure. Buying stock in Peabody Energy results in a deep and narrow position. There is more diversity along with the upside from other industries that shares in Joy Machinery and Caterpillar entail.

Security

Price (approx.)

Median Analyst Target Price over Next Year

5-year High

2014 Performance

Exposure to Coal Sector

Market Vectors Coal (KOL)

$18.70

none

$60.30 (June 2008)

-5%

Deep and Wide

Peabody Energy (BTU)

$16.40

$22

$88.69 (June 2008)

-15%

Deep and Narrow

Caterpillar (CAT)

$108.75

$112

$116.25 (April 2011)

21.20%

Correlated

Joy Machinery (JOY)

$61.70

$62

$103 (April 2011)

6.5%

Correlated

Source: Finviz, Yahoo! Finance and MSN Money.

Despite "war on coal," the sector is not going away. That makes Market Vectors Coal and Peabody Energy attractive investments for the long term. As the chart shows, each security is well below its five-year high -- when China was booming. Based on big money buying, that looks to be returning.

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.

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