Don’t Laugh But This Group is Outrunning Tech

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Technology is off and running again this year, but another, little-known group is outpacing it by a wide margin.

Don’t laugh… we’re talking about coal.

Van Eck’s Vectors Coal Fund (KOL) advanced 12 percent between the start of January and yesterday’s close. As you can see from this screenshot of Radar Screen® below, that’s more than twice the performance of the SPDR Select Technology Fund (XLK) and more than five times the appreciation of the broader S&P 500:

Radar Screen as of 2/15/18 close.
Radar Screen as of 2/15/18 close.

A few things seem to be going on. First, coal miners are emerging from a wave of bankruptcies and reorganization. Many old players are dead and gone, while others have come back to life in a new form. The two biggies in that category are Arch Coal (ARCH) and Peabody Energy (BTU). Then you have Warrior Met Coal (HCC), a new firm controlling the mines of now-defunct Walter Energy.

Some investors like these kinds of stories because the bankruptcy process often cleans up previous problems. (Think of the airlines after the September 11 attacks.) There can also be a period of reintroduction into the market as companies return to indexes and institutional portfolios.

But with coal, some other factors seem to be lending a helping hand as well. One is that a decade of falling production has shrunk inventories by about a quarter since 2011. That wasn’t a big deal for a while because domestic consumption also fell as power plants switched to natural gas. But a new trend has emerged over the last year as China went on a buying binge. Check out this chart from the U.S. Energy Department, which shows American exports (dark blue line) pushing the top of the long-term historical range (light blue field):

U.S. coal exports
Source: U.S. Energy Information Administration

One other member of this group traders might want to know is Teck Resources (TECK). While technically not a pure-play coal producer, it is included as a holding in the KOL fund. It’s also the most liquid of the group for options players, averaging more than 7,000 contracts per session over the last month.

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