In investing, it’s easy to get carried away with chasing the latest trends and the newest companies. I’ve found another (and often more lucrative) way to go about finding the next big stock investment. 

#-ad_banner-#I call this method “the view from 50,000 feet.” In it, I mentally take a huge step backward and look at the economy as though I’ve never seen it before.

This exercise enables me to see the big picture from the top down. My primary question: What themes have been consistent for more than a century? After the obvious — food, water, shelter — what other overriding theme has been at the forefront of economic growth?

The answer is energy — electrical energy, to be exact. Without electricity, the modern world as we know it would not exist. More importantly, the use of electricity is becoming more prevalent as the world grows more technological. (I know this is very obvious, but it’s easy to overlook when it comes to investing.)

Continuing to look down from 50,000 feet, I asked: What is the source of the electricity? Surely there must be great investment opportunities there. 

A large part of the answer is coal.

Coal generates over 40% of the electricity used globally. (Wired magazine, of all publications, had an excellent cover story last month about coal’s prominence in the world.) The International Energy Agency expects coal will pass oil as the world’s #1 energy source by 2017.

Although coal’s use in the U.S. is declining, it’s on the rise around the rest of the world. For instance, Germany — which is known for its use of renewable power sources — gets more than half its electricity from coal. In Poland, that figure is 86%, and many other industrialized nations have similar numbers. 

In China, coal generates more than three-quarters of the country’s electricity. In fact, China alone accounts for almost half the world’s total annual usage. To fuel its rapid industrialization, China is expected to double its number of coal plants by 2040. 

Worldwide, there are about 7,000 coal plants and nearly 1,200 more planned in 59 countries. Global coal usage last year totaled 7.6 billion tons, and this number is only going to go up as power demand grows and new plants come online.

This all sounds good. Coal is comparatively cheap, readily available and relatively efficient — but it does have a dark side. Convert coal into electricity is an extremely dirty process. Coal accounts for more than 40% of the world’s electricity — but it also accounts for over 70% of the carbon dioxide emissions produced by power generation.

Unfortunately technology has not yet advanced to the stage of allowing clean energy sources to substitute for dirty coal. The problem is how to manage this growth in coal use without causing an environmental disaster.

The answer lies in so-called clean coal technology, a method of capturing and containing emissions from the burning of coal. The gases are diverted into underground storage areas rather than pumped into the atmosphere. 

China is on the forefront of the clean coal movement with over a dozen carbon capture and storage (CCS) projects in the works. Peabody Energy (NYSE: BTU) is on the forefront of CCS technology and is working with China’s Huaneng Group, the Chinese government and various other firms on a billion-dollar project known as GreenGen. This project is meant to serve as a model for CCS plants all over China.

It is clear that coal usage isn’t going to decline anytime soon, so how does coal measure up as an investment right now? Using the Market Vectors Coal ETF (NYSE: KOL) as a proxy for the industry, it looks like now is a good time to jump on the coal investment train. The ETF has been beaten down over the past three years, giving back over 27%. However, price has formed a double bottom in the $17 area and has since bounced above both the 50- and 200-day simple moving averages into the $19 range.

Peabody Energy shows a remarkably similar price pattern as the KOL ETF. Price has bounced from the March lows and is now trading near the 200-day simple moving average.

Risks to Consider: The primary risk is that technology will discover a renewable energy that can economically and effectively compete with coal. In addition, a continued slowdown in China, along with the world, could weigh on the coal industry. Always use stop-loss orders and be sure to diversify when investing.  

Action to Take –> My 12-month target is $22 on both the KOL ETF and Peabody. That represents upside of 17% for KOL and 29% for BTU.

P.S. My colleague Dave Forest is also big on coal in general and Peabody Energy in particular. He’s been loading up on BTU in anticipation of renewed demand on geopolitical tensions — and he’s targeting 75% upside. Click here to learn more.