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Coal ETF Surges on Peabody (BTU) Earnings Beat

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Most materials firms have struggled mightily in 2013, as sluggish demand from key markets, a strong dollar, and a booming stock market have dulled the appeal of commodities. While this trend has been especially prevalent in precious metals, more industrial resources have also been impacted by the trend.

Take for example, coal, as the important (but unloved) commodity has struggled to post gains for 2013. Plus, the product remains well below its highs before the 2008 crisis, trading at just a fraction of its once lofty price.

Coal is also falling out of favor with many investors thanks to the rise of alternative fuel sources. These include not only solar power—which has been having a banner 2013—but natural gas as well. In fact, natural gas, thanks to fracking and other new technologies, has become more ubiquitous and thus a popular fuel input for power plants instead.

These factors have been disastrous for coal miners, with several going bankrupt or facing sluggish stock prices. Some are even beginning to write off much of the industry, though a recent earnings report could suggest that the worst might be over for the space.

Peabody Earnings in Focus

Peabody Energy (BTU - Free Report) is the largest U.S. coal producer, and as such can be seen as somewhat of a bellwether for the space. The company has faced extreme weakness but its latest earnings report came as a bit of a surprise to the market.

The firm was expected to lose five cents a share for the quarter, but posted results of 33 cents a share, thoroughly crushing estimates in the process. Though sales did miss estimates, the enormous beat on the bottom line and the shocking level of profitability came as a huge surprise to the market, and helped to push shares of BTU up over 7% on the day.

Beyond this solid beat, things could be looking up for the industry thanks to some broader industry trends. Natural gas prices have been pretty firm lately, while scorching weather across much of the U.S. has increased electricity demand (also read 3 ETFs for a Nuclear Power Renaissance).

These two factors have helped to boost coal demand as a substitute fuel, and this could increase if natural gas prices stay relatively high. In fact, the EIA revealed that coal consumption in the U.S. rose about 9.5% in the quarter, while they are also looking for domestic use to increase 6.7% this year thanks to heightened electricity demand.

How to Play

These trends could suggest that coal stocks may have finally bottomed out and that now might be the time to take a closer look at the space. However, the segment can be extremely volatile, so a diversified look—such as with a coal ETF—could be the preferred way to go.

Fortunately for investors seeking to go this route, there is one coal ETF available, the Market Vectors Coal ETF (KOL - Free Report) . Below, we have highlighted some of the key details regarding this ETF for those seeking to make a play on this beaten down but potentially well-positioned sector for the months ahead:

Coal ETF in Focus

KOL was launched in 2008, giving investors exposure to the Market Vectors Global Coal Index. This benchmark provides access to 34 companies from across the globe that are engaged in some aspect of the coal industry, charging 59 basis points a year in fees (see Are Coal ETFs Back on Track?).

Although it holds stocks across the globe, the ETF definitely has a U.S. focus as roughly 45% of the fund goes to American stocks. Beyond that though, the Asia-Pacific region dominates, with China (13%), Indonesia (8%), and Australia (8%), rounding out the top five with Canada (also at 8%).

In terms of capitalization levels, the ETF is skewed towards the smaller side, with mid caps taking up roughly half the portfolio, followed by large caps (27%), and then the rest in small/micro cap securities. For individual stocks, no single company makes up more than 8% of the portfolio, while the in-focus Peabody Energy comes in fourth place at roughly 6.7% of the total.

The performance of the ETF has been less than stellar (to put it mildly) to start 2013, as the ETF has lost nearly 30% since the beginning of the year. However, the ETF added about 2.3% in the wake of the BTU report, and the fund has moved higher by about 5.4% in the past ten days.

Bottom Line

Coal investing has been pretty terrible for much of 2013 as investors focused on clean energy and natural gas instead. This has left coal as both an unloved power source, and an overlooked investment (See 3 Unknown ETFs that Continue to Crush SPY).

Yet with BTU’s solid report, one could argue that coal has finally bottomed out. This may be particularly true if hot weather continues and natural gas prices hold firm, a combination that could further boost the fortunes of coal investing heading into the end of the summer.

Still, great caution needs to be applied to this space, especially with overall weakness in the commodity market. For this reason, we are keeping our longer term Zacks ETF Rank #4 on the fund, though we could certainly see a further bounce back in the short term for this beaten down coal ETF.

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