Natural Gas Rise Bodes Well for Coal Stocks

Natural gas prices have been slowly creeping up since bottoming out below $2.00 last April. At $3.64, natural gas is only a few cents off from its 18-month high. And that’s good news for coal investors.

As David Steinberg of DLS Capital Management told Barrons, coal prices tend to move inversely with natural gas prices. When natural gas becomes too expensive, some power companies switch to coal – and vice versa. And right now, coal is cheap.

The Dow Jones U.S. Coal Index is close to a four-year low right now, and is down 71% in the last year. According to the index, coal has rarely been cheaper over the past 20 years.

That makes it a good value play – especially with natural gas prices on the rise.

Steinberg recommended stocks such as Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR) as strong value plays for coal investors. My colleague and resident Wyatt Research resource expert Kevin McElroy likes Peabody Energy (NYSE: BTU), which unlike Alpha Natural pays a dividend.

Something Kevin wrote last June in an article titled, “Buying Coal on Sale,” still applies now:

“I firmly believe that an investment in this space could safely return 100%-200% gains in the next few years,” Kevin wrote. “The largest coal companies are selling for the cheapest prices we’ve seen since the depths of the financial crisis of 2008-2009.”

Nine months later, what Kevin wrote still applies. While coal stocks have fallen even further since last June, as Kevin said, if you look at coal as a long-term investment, you may be glad you bought it at such a steep discount.