It is almost impossible to consider that troubles of such a magnitude could turn around in an instant, but that may actually be the case. We have taken a look at the year-end outlooks for 2013, the coal sector could be set up for a new boom. Yes, that dirty nasty coal sector.

President Obama is not exactly the biggest fan of coal. Mitt Romney said he liked coal and the coal sector stocks rallied before the election. But then they sold off after the election. There are two sides to a story, so here is the bull and bear case for coal, with an actual verdict about the sector in 2013.

24/7 Wall St. has looked at both sides of the coin to make a decision. There are many risks in the coal sector. Any boom is not likely a return to the heydays of coal, but any improvement over the past 18 months or so might feel like a new gold rush on a relative basis. Bankruptcy risks are there for the weak players. Some of the less leveraged companies may even pursue defensive mergers to bolster their positions.

The Market Vectors Coal ETF (NYSEMKT: KOL) is the easiest and most diversified way to play the sector. If investors think the president’s policies will continue to wreck and pressure a bruised sector, then you can short sell it or buy put options. If you think the carnage has gone way too far, then you can start buying in shares gradually to build a base and add to it each month or so. Of course you also can start buying a spread of call options (or even sell naked puts if you have serious conviction).

The bullish case is founded on the notion that the major coal plant closures have happened already. Chinese manufacturing picking back up is another bullish driver, and the endless Fed easy money policy is not exactly bearish for coal, as the aim is to stimulate development at almost any cost until we get to 6.5% unemployment, as long as inflation is not expected to sustainably rise above 2.5%.

Rhiannon Hoyle in Barron’s recently suggested that two attractive coal players are Peabody Energy Corp. (NYSE: BTU) as a potential broad market outperformer and CONSOL Energy Inc. (NYSE: CNX) as a low-cost provider and port infrastructure assets. The Department of Energy is now forecasting that natural gas prices will be higher in 2013. and that may further support a building base for coal. Peabody’s $27.68 price compares to a 52-week range of $18.78 to $38.96 and compares to a Thomson Reuters consensus price target from analysts of $33.76. CONSOL trades at $33.75, against a 52-week range of $26.41 to $39.51, with a consensus analyst target of $40.30 for the stock.

Then there is the bearish case. Martin Sosnoff of Atalanta Sosnoff told Forbes point-blank that he would be a seller of KOL as the Romney rally for coal has come and gone. Kiplinger’s 2013 annual forecast edition even listed Alpha Natural Resources (NYSE: ANR) as one of five big stocks to sell in 2013. A research outfit called GMI Ratings was even quoted as putting Alpha Natural on a financial distress list and even warned that it could be forced to file for bankruptcy.

What about Arch Coal Inc. (NYSE: ACI)? This steam and metallurgical coal outfit is also down and out. At $7.566, the 52-week range is $5.16 to $15.99, and the Thomson Reuters consensus target is $8.88 for the stock. Imagine what will happen to the price target if the anticipated losses here in 2013 are not as bad as expected.

It is very hard to imagine that 2013 will come around and be the Year of Coal. Still, what if the worst has been seen? The snap-back rally that could take place might not just mirror what was a Romney rally right before the election. It might dwarf that brief rally. As always, betting on the weakest links in a battered sector is the riskiest way to be involved, because they can fail even if the industry recovers. That is why it is best to focus on the larger and more stable players, or the ETF.

JON C. OGG

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