King Coal

Published on Tuesday, 31 January 2012 15:41 Written by Todd Shriber

New York, January 31^st (TradersHuddle.com) – To say 2011 was a bad year for coal stocks might be understating things. Coal is one of the raw materials most intimately linked to the health of the global economy as the primary uses for are for electric power (thermal coal) and in the production of other materials such as steel (metallurgical coal). With investors fretting over the health of the global economy in 2011 and emerging markets inflation throwing a wet blanket on the commodities trade, coal stocks were savagely repudiated. As a result, the Market Vectors Coal ETF (NYSE: KOL) tumbled from nearly $52 in May 2011 to just over $27 by October.

But that nasty decline may spell opportunity with KOL in 2011. Heading into the start of trading Tuesday, KOL was up over 9% year-to-date, underscoring the notion that it has been high-beta fare that has led the market rally in January. To be sure, coal stocks and ETFs are as high beta as they come. Imagine if you will a mythical day in which the U.S. and China report their respective economies are growing faster than expected and on the same day Europe says it has solved its sovereign debt crisis. It’s almost a foregone conclusion that KOL would be one of the best non-leveraged ETFs on that particular day.

On the other hand, if the aforementioned scenarios were reversed and reported in negative fashion, which was often the case last year, KOL would be taken to the woodshed. That’s just the nature of the coal beast.

Beyond an improving international economy and increased demand from emerging markets such as China and India, there is another very real catalyst that could stoke a rally in KOL this year: Mergers and acquisitions. In 2011, KOL constituents Alpha Natural Resources (NYSE: ANR) and Peabody Energy (NYSE: BTU), the largest U.S. coal company, increased their size through mult-billion dollar acquisitions. Australia alone saw about $25 billion coal deals last year.

With so many noteworthy coal companies trading at deep discounts to their previous highs, analysts expect coal M&A mania to continue this year. Among KOL constituents, Alpha Natural Resources and Walter Energy (NYSE: WLT) have both been mentioned as credible takeover targets. Those two names account for over 11% of the ETF’s weight and the ETF has been frequently mentioned as one fund littered with obvious buyout candidates and the buyers themselves.

Put another way, coal consolidation and a resurgent international economy mean KOL is offering significant upside for the patient investor.

The vitals: With an expense ratio of 0.59%, KOL is home to 34 stocks and $334.3 million in assets under management, making it far larger than its only legitimate rival, the PowerShares Global Coal ETF (NASDAQ: PKOL). KOL came to market in January 2008 and tracks the Stowe Coal Index.