The dark days of coal suddenly lit up with coal ETF, Market Vectors Coal ETF (KOL), adding about 25% so far this year. In just the last one month, the fund advanced 27.5% while it scooped up about 17% returns in the last five trading sessions (as of March 7, 2016).
Investors should note that coal has long been a beaten-down commodity due to the growing popularity of the alternative energy space and soft global industry fundamentals. Global warming and high fuel emission issues as well as new and advanced technologies are making clean power more usable, curbing the demand for black diamond and hurting the profitability of coal producers.
Notably, coal producer Peabody Energy Corporation (BTU) incurred losses in the last five quarters. Another coal miner Arch Coal filed for bankruptcy and was delisted from the stock market (read: 5 ETFs Losing Half or More of Their Value in 2015).
What’s Behind the Shifting Wind?
However, shares of coal producing companies have lately been turning around. The renewed optimism in the oil patch may have acted as a jump pad for the entire energy sector (read: ETFs for Quick Profits from the Oil Rebound).
Plus, China’s intention to lay off about 20% workers in the coal industry to shift to a cleaner energy base led to a likely deceleration in supplies.
Peabody too is aggressively implementing cost-saving initiatives, has cut back on production and restructured its organization via lay-offs. The job cut will result in considerable cost savings every year. Peabody shares were up 82.3% in the last five trading sessions (as of March 7, 2016).
Coming to CONSOL Energy Inc. (CNX - Analyst Report), the rise in shares looks more sensible as the company has been shifting its focus to natural gas from the more struggling coal space. This diversified energy producer is well placed to cash in on any pickup in commodity prices that we are witnessing at the current level. CNX was up 35.4% in the last five trading sessions (see all Energy ETFs here).
Having said all, the coal ETF is an amazing value play. Even after the recent spurt, KOL trades at a P/E (ttm) of 14 times versus Energy Select Sector SPDR ETF’s (XLE - ETF report) P/E (ttm) of 24 times. Quite understandably, investors do not want to lose out on any moment to make some quick gains out of this undervalued coal ETF.
Can the Momentum be Sustained?
The road ahead for these companies is anything but smooth as the Clean Power Plan is sure to pose challenges. Not only in the U.S., the drive to lower carbon emissions and moderate the planet’s warming is rising globally. These have been thwarting the demand for coal in the U.S. The picture is almost the same in China. So, forget being solid, the medium-term outlook for coal can easily be called soft.
KOL in Focus
Even then, the ETF targeting the global coal industry is making the most of the opportunity in its hand. KOL tracks the Market Vectors Global Coal Index. Holding 26 securities in its basket, the fund is concentrated on the top 10 holdings at about 60% of total assets. It has a Chinese focus accounting for 27% of the portfolio, while the U.S., Australia and Canada round off the next three spots with double-digit weights each.
The fund has amassed $47.1 million in its asset base and trades in average daily volume of 71,000 shares. Expense ratio comes in at 0.59%. KOL has a Zacks ETF Rank of 5 or ‘Strong Sell’ rating with a High risk outlook.