A Potential 40% Gain... from the Most Hated Commodity on Earth
Being born and raised in the former industrial city of Pittsburgh exposed me to the old-school way of doing things at a young age. Although it's currently evolving, Pittsburgh was a city stuck in its ways for decades.
The city was built upon the so-called dirty businesses of steel and coal, so these two natural resources were a big part of my life as a child. Many of my relatives worked in the steel mills, and seeing trains loaded with coal seemed to be a natural part of daily life.
To make matters worse, China, the world's biggest consumer and producer of coal, announced this year it would reduce consumption and output of the commodity over pollution concerns.
Combine those strict environmental regulations with dirt-cheap natural gas, and what we see is a sharp plunge in coal stocks this year.
But don't think I'm bearish on this commodity. It's during setups like these that it pays to go against the crowd. Digging a little deeper, it's easy to see a huge profit potential for investors.
Despite so many issues about its adverse effects on health and the environment, coal remains a prime energy source for many economies, including the United States. Last year alone, coal was responsible for 42% of electricity generation in the country, according to the U.S. Energy Information Administration. And, though slowing, demand for coal remains high in developing nations.
And that's not surprising. Despite its downsides, coal creates far more energy than natural gas, nuclear, wind, solar and geothermal electricity. What's more, it's cheap and readily available.
Rather than taking on the risk of investing in a single company, however, I would instead buy an exchange-traded fund (ETF) such as Market Vectors Coal ETF (NYSE: KOL).
What I like best about this ETF is its international focus, which also limits single-country risks. While 55.4% of its assets are directed at U.S.-based firms such as Peabody Energy (NYSE: BTU), Joy Global (NYSE: JOYG) and Consul Energy (NYSE: CNX), the remaining assets are focused on international producers.
But there is another compelling reason to purchase Market Vectors Coal ETF. A popular technical trading tool is giving a clear buy signal at the current level.
Many traders and short-term investors are familiar with the Relative Strength Index (RSI). It is an oscillating indicator first popularized by Welles Wilder in his 1978 book, New Concepts in Technical Trading Systems. The index is used to locate stocks that are overbought or oversold by comparing increasing price moves to decreasing price moves over a specific time frame.
RSI is built into many trading/charting platforms with the Welles Wilder standard setting of 14 periods as the default. It is scaled on a chart from 0 to 100. Readings below 30 are believed to indicate an oversold condition; those above 70 are thought to indicate an overbought condition. The RSI for KOL just hit 29.1, indicating the stock is oversold.
This means the selling pressure will likely subside, resulting in a price bounce. KOL is currently trading near its 52-week low of $21.49 but has bounced back, creating a powerful technical buying opportunity.
Risks to Consider: Stocks can often remain in extreme oversold conditions for extended periods of time. Although, KOL's bounce indicates the bottom may be in, investors should be cautious when purchasing the ETF. Always use stops and position size accordingly.
Action to Take -- > The oversold technical condition combined with increased emerging-market demand means the stock should build a bottom soon. I expect to see shares near $30 within the next 18 months, which would mean a gain of nearly 40%. An entry at the current level with stops at $18 makes sense. Remember, this is a long-term investment, so patience is paramount.
P.S. -- Another source of energy that’s almost as hated as coal is nuclear power. Despite its bad press, it powers millions of homes across America. Right now, the United States is on the verge of a nuclear crisis that could put 31 million Americans in the dark... and cause a few uranium-mining stocks to shoot up hundreds of percent. Click here to get the details on this pending crisis... and how you can to profit.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.