We’ve had very good luck with new recommendations so far this year, and it is holding so far with coal mining MLPs Alliance Resources Partners  (NASDAQ: ARLP) and Alliance Holdings (NASDAQ: AHGP),  which have posted total returns of 28% and 18% respectively since joining the Aggressive Portfolio two months ago.

That performance was backed by the pitiless cost cutting reflected in improved quarterly results and an uptick in sales from the first quarter’s deep trough.

Domestic thermal coal prices have lagged behind a rally overseas fueled by China’s reduced output and early signs of a colder winter in the Northern hemisphere. But there have been encouraging developments for hard-pressed U.S. coal miners too, with previously bloated coal stockpiles at utilities down sharply on record air-conditioning demand that’s lifted power consumption.

Domestic prices have not yet responded to much to this diminished glut; suppliers signing short-term contracts continue to offer discounts relative to legacy contracts negotiated year ago. With output down as well, ARLP’s distribution coverage on a payout slashed in May will drop as low as 1.4x next year, from 2.3x for the latest quarter. That’s still a fair cushion for the worst-case scenario it represents. ARLP’s recent outperformance relative to its general partner AHGP, which has lower (but still full) coverage but much more growth leverage, shows just how much coal investors crave security these days, and how little faith they have in a lasting recovery.

They’re right about the long run: the coal-burning capacity of U.S. power plants is almost certain to continue its ongoing decline under pressure from state and federal regulators.

But over the next two or three years the lower stockpiles, reduced output and, likely, higher natural gas prices are likely to provide a cyclical boost for coal, the main alternative to natural gas as power plant fuel.

That’s why, while it would be tempting to take the quick profit and dump ARLP and AHGP, we would not recommend it. Instead, the timing and the pricing still seem right to build positions ahead of a bigger upswing as the still severely depressed fundamentals start to recover. The new buy limits on these securities target a well-covered 8% yield at current coal prices. But we expect significantly higher prices by the end of next year. That will be the time to revisit these positions. Buy ARLP below the increased limit of $22, and AHGP for no more than $27.