Coal Stocks: Best Picks for Long-Term Value

Larry Davidson - April 21, 2020

The coal industry has suffered harsh criticism over the past decade because of its environmental impact. However, coal is still an essential industrial commodity and it’s not going to disappear anytime soon. Coal fuels millions of homes and is a vital component in steel production, so international demand remains steady despite the controversy surrounding the industry. As a result, coal stocks remain a viable option for value-minded investors.

The Best Coal Stocks

Alliance Resource Partners LP (ARLP)

Alliance Resource Partners LP is one of the best options in the coal sector. The Oklahoma-based company is a diversified energy company with significant coal operations. Alliance also produces and markets coal to major U.S. utilities and industrial consumers.

The pandemic significantly decreased industrial demand for coal and other energy commodities. Rampant demand reduction created severe issues for the coal market, so Alliance decided to cease coal production from some of its mines to reduce costs. The affected mines include Alliance’s Illinois Basin and MC Mining operation in east Kentucky.

Warrior Met Coal Inc. (HCC)

Warrior Met Coal Inc. is based in Alabama, and the firm is a major supplier to the global steel industry. The firm focuses on mining non-thermal metallurgical (met) coal, also known as coking coal. This type of coal is the primary source of carbon used in the steel production process, so it’s a valuable commodity for the world’s metal manufacturers.

Arch Coal Inc. (ARCH)

Headquartered in Missouri, Arch Coal mines and processes various types of coal, including bituminous and sub-bituminous, low-sulfur coal. The company currently operates eight active mines and has active leases in several states, including Ohio, Virginia, West Virginia, and others. Arch’s customers hail from a variety of sectors, including utilities, industrials, and steel producers. 

Arch has excellent value ratios and looks like a bargain at its current price. Shares are currently trading at only 2.18 P/E, which represents a significant discount to the sector at-large. It’s 6.93% dividend also looks attractive in comparison to the market median for the energy sector. That high-yielding dividend is also surprisingly sustainable and represents only 12% of the company’s earnings over the past 12 months. 

Peabody Energy Corporation (BTU)

Peabody Energy Corporation is an end-to-end producer whose operations include mining, sales, and distribution. The company mines various types of coal and supplies electricity generation and steelmaking.

In February, Peabody Energy Corp and Arch Coal announced a partnership to increase coal’s competitiveness against other energy sources. The two companies will move forward with the venture despite challenges from the U.S. Federal Trade Commission (FTC). If the partnership passes regulatory scrutiny, the two companies could benefit from improved dynamics in the coal market.

teck resources coal stocks

Source: Teck Resources Limited

Characteristics Of the Best Coal Stocks

There are a few things to consider when shopping for coal stocks, namely:

Valuation

Coal stocks generally have P/E ratios ranging in the low-to-mid teens.

Financial

Most coal companies pay decent dividends and yield double-digit returns on equity (ROE).

Investors

Look for companies with a large portion of institutional ownership.

Trading

The best coal stocks trade on high volume and have tight bid-ask spreads.

Understanding the Coal Market

Government and politics have the potential to influence coal prices.  Certain aspects of coal have been on the decline for years. For example, the public widely views coal as an environmentally harmful fuel source. Burning coal creates air pollution and emits carbon dioxide into the atmosphere.

However, coking coal is still in high demand because it’s an essential ingredient in steel production. Emerging economies, in particular, need coking coal to produce steel for their rapidly expanding infrastructure.

One of the best sources to find data on coal is the U.S. Energy Information Administration. It releases weekly data along with a slew of analysis and projections.

EIA data best coal stocks

“Impact Investing” Hurt Valuations

The rise of impact investing in the U.S. has led many firms to shy away from investing in coal projects, which has had an adverse effect on company valuations over the past few years. Wall Street doesn’t want to sully its public image, so many large firms fear the public outcry that could result from coal investments. Since the big money is hesitant to play around in this sector, valuations have tumbled in recent years. Now, you can find many coal stocks that have excellent value ratios and solid fundamentals. However, the ESG investing movement has almost guaranteed that you will never see runaway gains in these stocks.

Regulatory Risks

There is a significant risk that regulations could choke off the industry over the next few years. Climate change movements are gaining momentum in the U.S. and abroad, and the coal industry is number-one on their hit list. It could spell disaster for the U.S. coal industry if the Democratic Socialists gain more political influence over the next few years. Currently, regulatory risks are the biggest threat facing the coal industry.

Bottom Line

Coal stocks are best suited for long-term investors with an eye for value. These assets tend to have stable business models, high dividends, and strong balance sheets. However, the industry is facing significant regulatory headwinds over the next few years. If an unfavorable crop of politicians is elected, they could literally dismantle the industry. That could spell disaster for coal stocks. However, steel producers still need coking coal to make steel and other metals, and many regions rely on coal to produce their power. Until the politicians can find a way to replace coal entirely, there will always be a demand for this widely misunderstood commodity.

Larry D. is one of the most experienced writers at the Dork. His expert insights into the individual stocks have made small fortunes for some of his readers and profitable trades for many more. Best known for his work with under-the-radar growth stocks, Larry has been picking winners for over 30 years.

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