Tags: Coal | Stock | Rally | shares

Peter Epstein: Coal-Stock Rally May Continue to Smolder

Friday, 10 Feb 2012 11:41 AM

Stocks in companies that mine coal are up 32 percent since October and prices could hold provided global economies remain robust, says Peter Epstein, a former hedge fund analyst and independent consultant.

In the U.S., stronger-than-expected unemployment rates were bullish for coal-related equities, although coal prices remain challenged.

"Given the huge employment numbers that came out on Friday, it's difficult to say that coal stocks will not continue to rally. But to reiterate, coal fundamentals were strong three months ago, and now they are weak. In my opinion, a bull case for coal stocks is largely predicated on a rebound in coal prices," Epstein writes in a Seeking Alpha column.

So what will predicate that rebound in coal prices?

Macroeconomics: If Europe avoids imploding and China avoids a hard landing, coal stocks could keep climbing.

"Historically when coal prices bottom, it's been a good time to buy coal equities. However, I think that recent buying of the coal names has largely priced in a possible bottoming. If one believes that Europe will not fall into a prolonged recession, that China will hold its own and that the U.S. economy will grow at say 2.5 percent or more this year and next, then continuing to buy coal stocks might make sense."

Coal producers may slash output to offset any declines in demand that could come as power plants burn more and more cheap natural gas, according to Dahlman Rose analyst Daniel Scott.

Production cuts are "necessary given current conditions," Scott writes in a note to clients, according to the Associated Press.

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