Warm Up With Some Coal

 | Feb 08, 2013 | 2:00 PM EST  | Comments
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Almost everyone expected the markets to sell off after the national elections, as talks of fiscal cliffs, higher taxes and debt limits stalked the stock market. Instead, stocks set a low 10 days after the election, but reversed to shoot almost straight up by a quick 12%.

To say that this has been fun for a deep value guy like me is a grand understatement. We have seen cheap stocks such as Tecumseh Products (RECUA) leap ahead by more than 50% in just two months. My Japanese longshots, Sony (SNE) and Panasonic (PC), have gone almost vertical with both gaining over 30% in the past month. My two biggest dogs have even joined the party: Radio Shack (RSH) and SuperValue (SVU) have each recovered by 50%. Bank of Ireland (IRE) has given up some of gains, but is still up 50% since the party started in mid-November. Small banks are catching a strong bid, and there have even been a few takeovers in the space.

All of this is nice, but my twisted mind wants to know what is not working. I want to see who was not invited to the party -- and have any of them become cheap enough to buy? As the market worked its way higher, which stocks are going down and may soon be bargain issues?

To the dismay of many, one thing that is clearly not working is gold. The metal itself has  basically been flat over the last couple of months, but many of the miners have gotten hit pretty hard. I am not a gold buy by any stretch of the imagination but gold mining is a business like any other so I am interested if the stocks are cheap enough. I own a little bit of AuRico Gold (AUQ), but the stock is still trading above my original purchase price -- in spite of a 12% decline in the last three months. The stock trades right at tangible book value but I need a much steeper discount to asset value to buy into a business with high capital expenditures and reliance on commodity prices. If the stock falls below $7, I may scale into a few more shares.

Coal is really not working right now in the stock market. Most of the domestic coal mining stocks have fallen sharply so far this year. Demand is weak domestically and exports have been slow to rise as steel demand is low in Asia and Europe right now. Competition from cheap natural gas has, at least for now, changed the game in the power generation markets and coal stocks have paid the price.

But as a long-term investor, I like coal. Those who think the U.S. can achieve energy independence in the intermediate term without increased coal usage are kidding themselves. Export demand, especially form emerging markets, is going to resume and accelerate sooner, rather than later. I am long Arch Coal (ACI) and am down a little on the stock so far. Trading at 50% of tangible book value, the second largest domestic coal miner is too cheap not to own for long-term investors. The stock is off almost 20% so far this year and if the slide continues, I will buy more shares.

Alpha natural resources is a little tough to value as the tangible book value is negative as a result of the goodwill form the Massey Energy acquisition back in 2011. They are the largest coal producer in the country and have the best access to the export market according to many industry observers. The stock has declined 17% in the last month and more than 60% over the past year. This has my inner vulture on alert. After reviewing the bond ratings, recovery ratings and the balance sheet, I think the value of the equity is at least 50% higher than the current quote in a worst case scenario and more than twice the price in an economic recovery that increases coal demand.

I think investors with a five-year or longer-time horizon may want to consider buying these two coal stocks at their current prices. Remember to start small, move slow and scale into the stock. I have never picked a bottom in a stock in my life, and it is likely these two will move lower before they go higher.

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