A select group of coal stocks just got a boost from the Environmental Protection Agency.
The EPA is requiring that all coal-fired generating facilities introduce sulfur scrubbers to decrease the amount of sulfur dioxide pollution entering the atmosphere, with the effect of encouraging the use of "dirtier" coal from the Illinois Basin at the expense of higher-grade Appalachian coal.
This is a great opportunity for investors - and here's one of the best ways to profit from this industry change.
Now Is The Time to Buy These Oil Refiners and Coal Stocks
Without fail, every year there are January surprises.
They occur when investors receive a pop in selected stocks because of the way fund managers readjust their holdings to dress up their fourth quarter performance.
These improvements don't usually last very long.
In fact, most investors will see the affected stocks decline back to normal levels by mid- to late-January.
But for a few weeks, investors can earn a nice little return as the calendar begins the New Year. This hedge-fund effect will be of special interest to energy investors in 2013.
That's in stark contrast to last year when oil-related stocks were moving in one direction while natural gas stocks were moving in another. What's more, service companies were beginning to come off of their highs at this point in 2011, and King Coal was about to fall off a cliff of its own.
This time around, we have a fiscal cliff soap opera in the U.S., continuing credit concerns in Europe (although with a parallel rise in market optimism emerging on the continent), rising uncertainty again in the Middle East, and a simmering dispute between Japan and China.
In short, even ignoring the Mayans and their approaching December 21 deadline, there is no lack of concern in the market these days.
Still, there will be several beneficiaries in the energy sector as hedge fund managers make their moves over the next few weeks. This is likely to happen across several categories of companies.
In this case, investors would be wise emphasize two segments of the energy market that are currently on the rise: oil refineries and coal stocks.
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How the Election Just Killed Investing in Coal Stocks
In the days following the re-election of President Obama, one particular stock sector seemed to suffer more than most: coal stocks.
The Market Vectors Coal ETF (NYSEARCA: KOL) was down 5% the day after the election and individual coal company stocks were hammered even more. The largest U.S. coal producer, Peabody Energy (NYSE: BTU), dropped by 9% while the second biggest U.S. producer of coal, Alpha Natural Resources (NYSE: ANR) fell by 12%.
The reason behind the declines is the perception in the market that President Obama's re-election will mean further onerous regulation for the beleaguered U.S. coal industry.
Lucas Pipes, an analyst at Brean Capital Carret & Co., told Bloomberg News, "The coal industry has seen increased regulatory oversight from the EPA on a number of issues under Obama's first term, such as stricter permitting requirements in Appalachia and new regulations for emission reductions at utilities."
Earlier this year, for instance, the EPA issued its Mercury and Air Toxics Standards Rule, which is set to go into effect Jan. 1, 2015. It sets strict emissions requirements on utilities.
According to a study from the consultancy Brattle Group, compliance with the rule would cost between $126 billion and $144 billion to retro-fit older coal-fired power plants. Brattle estimates this will lead to a shutdown by utilities of between 59 and 77 gigawatts of coal-fired electricity over the next five years.
This means that between 18.6% and 24.3% of U.S. power will no longer be generated by coal.
Basically, EPA regulations have made coal more expensive to burn. This will reduce coal demand even further as utilities switch to cheaper, cleaner-burning natural gas. Already the share of U.S. electricity supply coming from coal plants has fallen to its lowest level in almost 40 years.
At times this year, coal has lost its position as the country's biggest source of power, falling behind natural gas. Not surprising then that production from the U.S. coal industry has fallen 8% from 2008 to only 266 million tons in the first quarter of 2012.