One trader’s very contrarian case to buy coal stocks

Coal stocks have plummeted this year, with the Dow Jones U.S. coal index falling to all-time lows this week. Alpha Natural Resources filed for bankruptcy on Monday, becoming the fourth large coal company to do so in two years.

The sector took another hit when President Barack Obama announced his plan to cut carbon emissions from the power sector 32 percent by 2030 from 2005 levels. The index closed down more than 7 percent Monday.

But despite the smog of bad news, one trader still says it's time to buy coal stocks.

"We've seen a number of bear market rallies in the coal space since 2011. We're very close to getting one now that we've got an implosion in commodity prices globally," Larry McDonald of Societe Generale said on CNBC's "Trading Nation."

Read MoreIron ore's bull run is merely technical

The Dow Jones coal index is down more than 61 percent this year. Other commodities that have taken a tumble include gold, which has recently fallen to five-year lows, and oil, which has fallen almost 15 percent this year.

According to McDonald, the commodities collapse and strong dollar will push the Federal Reserve to implement measures that could leading to a rally. He also brushed off concerns following Obama's speech and its potential to drive coal stocks even lower.

Read MoreObama unveils clean energy plan, amid legal threats

"At the end of the day, he only has another year and a half left in office," McDonald said. "The measures that he's pushing forth today really go into effect in 2017. At that time we'll have a new administration."

However, Andrew Burkly of Oppenheimer said the pressure from a strengthened dollar and declining global demand is too harsh for any real improvement in commodities. Coal faces additional challenges with increased regulation in energy, he said.

"I think you're going to get oversold bounces in this decline but the fundamentals are really poor for commodities in general, coal in particular," Burkly said.

Along with Alpha Natural Resources, rivals Patriot Coal, Walter Energy and James River Coal have also filed for bankruptcy in the past two years.

Read MoreAlpha Natural files for Chapter 11 bankruptcy

But McDonald said he sees the Market Vectors coal ETF (KOL) rebounding in the next six months. KOL has fallen more than 35 percent this year. "A tremendous amount of bad news has been priced into coal," he said.

McDonald made a similarly bullish call on coal stocks on CNBC in 2013, predicting then that they would rally 30 percent in 2014. Instead, the KOL ETF has fallen some 50 percent from the start of 2014 up to Tuesday.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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