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By Jason Stipp | 03-23-2011 04:06 PM

A Coal Pick Worth Digging Into

Morningstar's Paul Larson says this Powder River Basin coal firm could benefit from its low-cost production, future exports to Asia, and a halted nuclear renaissance.

Jason Stipp: I'm Jason Stipp for Morningstar.

Paul Larson, equity strategist and the editor of the Morningstar StockInvestor newsletter, recently made a purchase for his Hare Portfolio in that newsletter in the energy sector.

He's here to tell us a little bit about why he was attracted to that name. Thanks for joining me, Paul.

Paul Larson: Thanks for having me.

Stipp: So, before we get started, I think it's interesting to note that there aren't a lot of opportunities out there today. When we look across the market, things look, on average, fairly valued. Would you say that that's a pretty good assessment of the situation?

Larson: I would agree that when you roll up our price-to-value ratios across our coverage universe, the average stock is looking roughly fairly valued. Of course, there are individual opportunities out there that still look cheap, but they are much fewer in number than they were just a couple of months ago, especially when you look at the wide-moat universe, which is really where I do most of my hunting for ideas. Wide-moat, 5-star stocks--we had roughly three dozen of them as late as last August, and now we're down to less than 10, and frankly, I own just about all of them.

Stipp: So, this is not to say that the market hasn't hit a few bumps and turmoil recently. The most recent of which, of course, is the Japan crisis, and that's somewhat related to the stock pick that you have, which is in the coal industry. Can you talk about the crisis and how that affected what you see as the future for this pick?

Larson: Sure. Well, the company that I recently bought is certainly an enterprising pick, and it is only a narrow-moat stock, but I think that the catalysts here are real and the valuation is really attractive.

The company name is a Cloud Peak, ticker CLD. How this is being impacted by Japan: Cloud Peak is a coal miner. Their mines are in the Powder River Basin in Wyoming, and this is a low-cost area of mining coal.

But the way that Japan is impacting the coal industry is that with the situation at the nuclear plant in Japan, I think this is going to stop the so-called "nuclear renaissance" in its tracks, and that means that 10 years from now, nuclear power is going to be a much smaller portion of the worldwide energy supply than otherwise would have been had this nuclear renaissance continued.

So, with nuclear being a much smaller portion of the pie, that means that all other energy sources, including coal, are going to have to pick up the slack.

Stipp: So to follow-up on that, coal also, as far as environmental impact, it also faces some headwinds. How do you factor that into the extra share of the energy pie that coal might have in the future?

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