Coal stocks have outperformed the S&P 500 by 14 percent since July 1, but now may be time to cash in after Goldman Sachs reduced its rating on the sector to "neutral" Monday.
"We see 13 percent upside to our target prices and believe a neutral coverage view is more appropriate," the report said referring to stocks of coal producers.
Goldman said in the report that it remained positive on the medium-term outlook for the price of metallurgical coal, which is used in the production of steel. But said that outlook was already priced into the sector's stocks.
"Growth in demand is likely to outpace capacity expansions, leaving mine utilization rates in Australia and the United States elevated," the report said.
Peabody Energy , which describes itself as the world's largest private-sector coal company, kept its "buy" rating from Goldman. But Alpha Natural Resources saw its rating reduced to "neutral."
Consol Energy also retained its "buy" rating due to its "attractive low-cost asset mix and upcoming catalysts", the report said.
Goldman said that Peabody Energy was its "favorite coal stock" and is a "secular winner with organic growth options". Alpha Natural Resourcesdoesn't have the same catalysts to drive it higher, the report said. Alpha is also factoring in strong gains in the price of coal, which could limit its upside, it added.
Goldman said it remained neutral on Arch Coal , Walter Industries and Massey Energy until it gets "greater clarity" on certain issues.
"Over the coming months we believe stocks are likely to remain rangebound," the report said.
Goldman raised its benchmark metallurgical coal forecast for 2012 to $193 per metric ton from the previous $175.
"Sentiment towards (metallurgical) coal fundamentals is already very favorable, particularly due to recent supply disruptions in the US, Russia and Australia," it said.