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We know that there’s a long-term shift going on in the U.S. from dirty coal to cleaner-burning natural gas.

If you listen to the news, you’ll be forgiven for thinking coal is out of the picture. Natural gas is making big steps, now powering 26% of our electrical plants. But, according to the Energy Information Administration (EIA), we still power 42% of our electrical plants with coal. That’s still the biggest slice of the pie.

Over the longer term, we may eventually rid ourselves of much of the need for coal-fired plants and use more natural gas, nuclear and renewables. But for now, coal is still a part of our present, and it’s going to be a fairly important part of our future for the next five to 10 years.

And that means there’s still money to be made in this ugly duckling form of energy.

Europe and Japan: The New Fundamental Catalysts for Higher Coal Prices

Even as coal remains an important part of our energy supply in the U.S., demand for it is growing overseas. In fact, Europe is beginning to import coal from the U.S. because its natural gas prices are still expensive (unlike ours here in the U.S.). U.S. exports of coal have risen 24% in the first half of the year, and 13% of that went to Europe.

In addition to this, Japan is turning back to coal. The 2010 tsunami and nuclear disaster left them burnt out on nuclear energy. As they try to wean themselves off of anything nuclear, what are they turning to? Coal!

In fact, they’re drawing up plans right now to implement approval of coal-fired plants starting in 2013.

So between Europe’s increased use and Japan’s renewed interest in coal, it adds up to a lot of new demand. That’s going to be the catalyst to drive coal up from its suppressed levels. So let’s look at a long-term chart of the Market Vectors Coal ETF (KOL), an ETF that tracks coal companies, to see what this all looks like. (KOL is a great mix of coal companies from around the world.)

The Chart Says Coal Companies Are Forming a Bottom

See larger image

In looking at how KOL has traded over the past five years, we can see that it tanked as the global economy went into a tailspin in 2008.

Volume Spikes Reveal Great Buying Opportunities

KOL crashed from just above $60 a share down to just under $10 a share. However, notice the huge surge in volume highlighted in red to the left side of the chart.

That’s where the crowd that was invested in KOL finally gave up and threw in the towel on coal stocks ever coming back. That told us a lot, because the crowds almost always get it wrong and focus on the “darkness” right before the dawn.

Sure enough, after that huge volume died down, KOL began to build a base sideways and then began its next ascent from just over $10 a share up to just over $50 a share. Not too shabby for a hated, dirty energy source.

Well, I’ve said all that to say this: We’re at that point again.

Look to the right of the chart and what do you see? KOL has crashed from $50 down to around $23 or so. After all, the world isn’t in quite as bad of shape as it was in 2008, even though it’s no bowl of cherries now. So it’s only fitting that KOL’s price decline hasn’t reached 2008’s lows.

But now look at the spike in volume highlighted on the right side of the chart during KOL’s decline. That’s when investors threw in the towel once again. And what happened next? KOL broke its red downtrend line.

So what does the future hold for KOL now? It could pull back near-term or base sideways for a bit longer. But after that, I believe it will climb back into the $40s, which is where it meets the black long-term downtrend line.

You see, KOL can continue to decline overall and still present awesome opportunities because of the wide volatile ranges that it has due to its booms and busts along the way.

I believe that KOL’s downside is very limited now relative to its upside potential. In fact, even if KOL does half of what I expect it to, it will still end up being a very respectable return.

KOL is Fundamentally Solid

I also believe KOL is a great buy now because it’s fundamentally cheap again. KOL has a P/E of 10 and a dividend yield of 2.15%. That’s a compelling combo.

But it’s not only cheap relative to its collective earnings right now, it’s also cheap compared to its average price-to-book ratio of 0.91. This means that KOL actually trades just a hair under its liquidation price (if you were to simply sell off all of the assets of all the companies comprised within KOL). That means it’s priced cheap compared to its assets now, as well.

This ETF is also cheap relative to stocks in general. For instance, the S&P 500 trades at an average P/E of 16.50 as of this writing. Yet, KOL trades at a P/E of 10. So you’re only paying 10 times the level of earnings for KOL compared to 16 times for an average S&P 500 stock.

If we see KOL make it up to the P/E average of the top 500 stocks in America then we’ll see it get to a price of $35.48 per share. That would be right at a 50% gain from the price that KOL sits at today.

Like I said … if KOL only hits half of what I think it’s capable of doing, then it will be a well-above average return, for sure.

The charts show that KOL is likely going back into the $40s. Fair fundamental valuations show that it could easily go into the mid-$30s. Right now it’s in the low $20s.

So buy KOL again now while it’s despised by most everyone. Sure, one day, in the long run, coal companies may be out of favor as clean natural gas takes over. But for the next few years, at least, coal is still a major player in the electricity generation space.

Have a nice day!

Sean Hyman

P.S. Finding just the right time to make a move on coal is a matter of spotting the signs. If you know what to look for in the data, the indicators are always there to tell you what play to make next. A chance encounter with a doctor, of all people, led me to develop my “flashpoint indicator.” I’ve used it to lead my Currency Cross Trader subscribers to a series of wins over the past 11 months. To learn more about this unique indicator – and how it can work for you – click here for my special report.

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