A Coal Stock Worth Buying?

Readers may have noticed that I don't often write about coal stocks. That is because I try my best to be positive, and coal is a hard subject on which to be that way. It is still needed, for sure, but its long-term future in a world of increasing concern about climate control and emissions is uncertain at best. The companies involved in its extraction, processing, and distribution are essentially in a race against time, trying to make the most money they can from their assets before those assets lose all value…not exactly an inspiring background for positivity!

That doesn't mean, though, that there aren't short-term opportunities in coal stocks. Admittedly, the last one I identified, back in January of 2023 wasn't a buy but a short of Peabody (BTU). That worked out okay as the stock dropped from around $30 at the time I wrote the piece to around $20 a short time later, but identifying buying opportunities is a bit harder given that there is always the background of the inevitability of long-term decline. Sometimes, though, the immediate fundamental conditions and a technical look at the chart both point to a short-term pop in a coal stock that is just too good to be ignored.

That is the case right now with Warrior Met Coal (HCC).

As their name implies, they produce metallurgical, or "met" coal for use in smelting of ores and the production of metals like steel. That product focus is the basis of the fundamental case for buying the stock.

Over the last few months, the overall view of the global economy has become much more positive than it was last year. The Chinese real estate crisis seems to be under control and the US and other developed nations are looking at interest rate cuts after some steep increases. That optimism can be seen in a still firm oil market, along with things like copper, which is nudging multi-year highs. That points to a resurgence in basic manufacturing, stimulating steel demand and therefore demand for coal. You can be pretty sure that coal prices won't hit their post-covid squeeze levels of 2022, but increased demand should keep them significantly above their pre-pandemic levels, plenty high enough for a company like Warrior to operate profitably. Incidentally, that is something they have done consistently since early 2021.

And yet, because of that long-term pessimism about the industry that I mentioned, HCC trades at trailing and forward P/Es of around 7.5 and at less than two times sales. That is cheap, even for a coal stock.

So, we have a good outlook for the industry over the next few months and a stock that represents value, but what does the chart say? Regular readers will be aware that for me, a fundamental case is an idea that only becomes a viable trade if there is a case to be made for buying the stock based on the chart. There is in this case…

The first thing that jumps out at me when I look at the 1-year chart for HCC is the inverse head and shoulders pattern that has formed this year, suggesting that after a period of consolidation such as we are in now, the next move will be up through the 71.91 high achieved a couple of weeks ago. Meanwhile, that pattern also offers up an obvious stop loss level at around 55 which would represent a loss of around 13% if things don't work out. That is maybe a little higher than ideal, but with just a return to the high representing a profit of the same amount, let alone any more than that if that level breaks as expected, it looks like a viable trade.

Buying coal stocks is not my favorite thing to do, even for a short-term trade, but in a weird way, that makes me even more convinced that going long HCC at these levels is a good idea, because if the case for it wasn't really strong, I wouldn't have even considered it. It is, though, and I did, so over the next couple of trading days, I will be establishing a long position in HCC, looking for a break above $72 before too long.