Investors could benefit from ditching these three problematic coal stocks now, given recent developments in wind energy.
All countries are developing policies to enhance the shift towards renewable energy sources. In the U.S., the Inflation Reduction Act (IRA) has provided significant tax credits and incentives for wind energy projects. In the same manner, Europe’s REPowerEU Plan can quickly increase renewable energy capacities to address the energy crunch. These regulatory frameworks are important in developing wind energy and reducing the use of coal from coal stocks.
Meanwhile, technological advancements like advanced analytics, especially in predictive maintenance using artificial intelligence, and the improvement of wind power generation forecasting are improving wind energy potency. This makes wind a serious threat to the long-term longevity of coal stocks, especially as we’re pivoting away from thermal coal burning.
Peabody Energy (BTU)
Peabody Energy (NYSE:BTU) is a coal stock investors should eliminate from their portfolios.
In addition to the domestic market, Peabody’s thermal and metallurgical coal is exposed to the seaborne market. This has been uncertain amid disruptions along major shipping routes. Other countries and major importers up the ante in their investments in renewable energy. The future of coal does not look bright. Decreasing prices of its coal products could further diminish Peabody’s revenue and profitability.
Also, BTU’s P/E ratio is rather low, which at first sight makes the stock look quite cheap; this might actually be a value trap rather than a good opportunity. The low price could be because its EPS is only expected to grow around 0.5% next year, per analyst forecasts.
Arch Resources (ARCH)
Arch Resources (NYSE:ARCH) is a coal stock to sell because its thermal coal division is under pressure. This is due to falling sales volumes and eroding margins. Its energy division is also weak. This trend is expected to persist, with the thermal segment’s share of profits substantially lower than historical levels.
Furthermore, analysts’ sentiment has switched to neutral in the last few months. Some have reduced their recommendation from Strong Buy to Hold. This change in perception could be attributed to a change in investors’ attitudes regarding the company’s future. Such variation in analyst price targets also shows Arch Resources’ future worth and possibilities are not well known and understood.
Like BTU, ARCH’s valuation is low, which further signifies that the market does not value its fundamentals highly. It trades at just 0.9x sales, which is another area of concern.
Ramaco Resources (METC)
Ramaco Resources (NASDAQ:METC) has problems even if the stock price has recently started rising. The company’s high trailing P/E ratio of 26x suggests it is overpriced compared to its competitors within the coal mining sector. This is substantially higher than that of BTU and ARCH. In saying this, its projected EPS increases are very steep. This too, could be a risk for the business if it fails to meet its lofty targets of mid-double-digit growth over the next few years.
There is also a high probability of fluctuation in Ramaco’s share price due to the heavy influence of institutional ownership on the company. These entities own many shares, which can affect their stock price, especially as their market cap is small at just 726 million. The high level of short interest at 6.27% in the stock means investors are betting it heads downward in the short term.
In these cases, I like to rely on the crowd’s wisdom, and these factors point to METC as one of those coal stocks to sell.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.