Coal Play

The U.S. is the Saudi Arabia of coal, Cramer says. And with the Middle East as turbulent as it is these days, it might be easier to deal with Indiana than Iran.

Especially with all this lip service paid to energy independence. And it’s not like the U.S. is building refineries or nuclear plants. Nor has it found a way to effectively transport ethanol.

Enter coal.

Coal is cheaper than oil. While oil prices are at a 52-week high, coal has climbed much more slowly. At present levels, it’s a better play than ethanol if the goal is to turn it to liquid for use in cars. Actually, it’s better than ethanol anyway, Cramer says. The best part? The U.S. has lots of coal to go around.

From an investor perspective, there are few reasons to like coal. The demand is high because the U.S. doesn’t yet have the infrastructure produce enough quantity. Simple supply and demand means that prices should go higher. Also, China will soon change from an exporter of coal to an importer. That should help the numbers, too. High natural gas prices can’t hurt either. Usually people turn to nat gas when coal gets too expensive, but high nat gas should keep them in coal.

Even better: Goldman Sachs downgraded the coals Monday. That should put the group at a nice discount now, just in time for Home Gamers to buy in.

So what are the plays in this ripe and ready sector? Arch Coal and Consol Energy are worth a look, Cramer says.

Arch Coal is a bit risky, Cramer will admit, because a good portion of its production is uncommitted for 2008 and 2009. This is great is the price of coal continues up, but if it doesn’t, the company lost the chance to lock in at present levels. Arch Coal is levered to high coal prices, though, and it has the best coal-to-liquid technology, says Billings Friedman. Still, it’s not a stock for the feint of heart.

Consol, on the other hand, has the highest cash margins of all the coal producers, Cramer says, and it’s a more efficient miner. There’s a possibility of a takeover, as well as a buyback. If the company turned its reserves into a limited partnership, that could add anywhere between $2 and $8 to the stock. Consol is a better play all around because most of its production is already committed. There’s no gamble on future coal prices here.

Bottom Line: If you feel like taking a chance, Arch Coal is for you. Otherwise, you want CNX, Cramer says. The breakdown on Peabody is up next.

Jim's charitable trust owns Goldman Sachs.

Questions? Comments?