The One Stock You Can’t Pass On

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The One Stock You Can’t Pass On By Ian Cooper | Thursday, July 21st, 2011 About a year ago, I wrote an article about peak coal. And I took some heat for it… “I’ve had it,” wrote Mark S. “Peak oil, peak natural gas, peak water, peak uranium. What about peak fear mongering, Ian? These peaks don’t exist. We have plenty of oil. It’s not going anywhere. You’re just trying to sell letters.” You’re wrong, Mark... and you forgot peak coal. "What you're missing," I explained in my response to Mark, "is that Peak Oil does not mean the world is running out of oil; Peak Oil refers to flow rates. It refers to the fact that the 'easy-to-get-to' oil is gone, and now we must go after the hard-to-reach, more expensive crude... Even the U.S. Energy Information Administration and the CERA Global Oil Group — no friends of Peak Oil theory — agree that we've reached this point. And the UK and Germany, as well as the U.S. military, are preparing for it." After apologizing for giving me a hard time (his words), Mark asked what he should buy. But I didn’t have the heart to tell an 82-year-old man that he missed the monstrous run in shares of Brigham (BEXP) on some "crap" theory... I did tell him our massive coal supply is shrinking. It was once thought there remained 250 years of coal reserves. We were told there was no need to worry about supply during our lifetimes, and that coal prices would remain cheap... That's no longer the case. Like oil, the easy-to-reach coal is dwindling by the day. And like oil, as global supplies fall, demand will spike. Advertisement Things Are Going Downhill Fast... Weeks ago, I warned you that June 30th could mark the beginning of the end for income investors. On that date, QE2 was due to stop — meaning the U.S. would no longer buy $100 billion worth of bonds each month. I said at the time, that move "could lead to the most devastating financial crisis since 1994 — the worst year ever for bonds." Never did I think things would start going downhill so fast. Within one week of June 30th, Minnesota's state government shut down. And that is just the beginning. Click here now to find out what's next and what investments will help you to sidestep this bond debacle.  So Mark bought Peabody Energy (NYSE: BTU), watching it spike from $40 to more than $70 within a year. Now, I don’t bring this story up to gloat, or to toss cold water on a loyal reader. I share it because Mark — who is now a lifetime subscriber — emailed me once again to get my next hot coal pick. It seems Peabody did quite well for the guy over the last year. I still like Peabody, I told him. And this time around, the coal demand supercycle should be a great catalyst.  Coal Demand Supercycle Global demand is exploding. In China and India, electricity demand is up 14% and 8%, respectively; European coal generation jumped some 13% over the last year following Japan's nuclear nightmare, all of which helped drive Peabody's strong Q2 earnings growth and guidance. While global supplies continue to fall, demand is expected to spike even more... China was using 3.25 billion tons of coal last year, up 5.9% year over year, and that figure is likely to increase by 4.24% a year from 2011 to 2015. Coal consumption in India is expected to run another 20% higher over the same period. Plus demand from emerging markets — especially for metallurgical coal needed for steel — is exploding. Global steel demand is expected to run another 6.5% to 7% this year on strong growth in developing countries.  And yet, in these early stages of coal's supercycle, not everyone is enthused about coal mining stocks... As Tadeusz Patek and Greg Croft explain in Energy, the seven billion tons of coal "the world is now mining and burning each year is about the best it can do." The pair predicts coal will peak not because supplies are running out, but "because remaining deposits are increasingly difficult to find." Advertisement Better than Stocks They go up higher than stocks... They're cheaper to buy than stocks... And you can trade them with an 85% success rate. But hardly anyone uses them. Find out how to get started today.  The Best Way to Play Coal Upside If shares of Peabody can break above $60 resistance, the sky's the limit — especially with China running into peak production. You see, if the Middle Kingdom can't increase domestic production levels, upping imports to meet demand may be tough, especially as coal prices run even higher. One of the best ways to trade BTU upside is with call options. (I've covered this before, here and here.) With BTU, I'd rather you buy the January 2012 BTU 62.50 call options (BTU120121C00062500), trading just above $5 as I write this. It has open interest of 868 contracts and a delta of 0.5166. You can also buy the underlying stock up to $61. If you want exposure to the larger coal group, you can take a position in the underlying Market Vectors Coal ETF (KOL) at or near $50, or for greater profits, the KOL January 2012 50 call options (KOL120121C00050000) trading just above $3. It has a delta of 0.5256. We'll update the positions as we move forward. Stay Ahead of the Herd, Ian L. Cooper Analyst, Wealth Daily Refer a Friend to Wealth Daily

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