Coal stocks have gone underground in recent weeks, and none of them has dug as deep a hole as Consol Energy [Ticker: CNX]. Shares of the Upper St. Clair coal and natural gas producer have fallen 43 percent since hitting a 52-week high of $119.10 June 19, closing Friday at $67.85.

Consol missed Wall Street estimates by a mile when it reported second-quarter numbers Thursday. Net income totaled $101 million, or 54 cents per diluted share, vs. the 80 cents per share analysts were expecting.

President and CEO J. Brett Harvey's confession cited a host of factors, including production problems that Consol investors who lived through similar glitches in 2003 no doubt remember. Other problems: higher costs related to an acquisition; starting up a mine to offset production shortfalls at other mines; commodity price increases; and higher labor costs, including expenses related to complying with new health and safety regulations.

Here's how those items dented the bottom line. Even though customers paid an average of 16 percent more for a ton of Consol-produced coal than a year ago, it cost Consol 25 percent more to produce it. The result: the per-ton margin fell 17 percent to $6.90.

Alleviating some of the pain were the record results posted a day earlier by CNX Gas [CXG], a natural gas producer Consol took public two years ago. Consol retained an 82 percent stake in CNX, which posted second quarter earnings of $64.3 million, or 42 cents per diluted share, up 55 percent from year-ago earnings. Production increased 26 percent, while prices were up 24 percent.

Investors punished Consol shares for the unanticipated earnings shortfall, sending them down 16 percent Thursday and other 9 percent Friday.

The pounding followed a July correction that sent Consol and its brethren down sharply. In July's first 25 days, Consol fell 27 percent after rising 57 percent in the first half of this year. Peabody Energy [BTU] was off 25 percent after being up 43 percent in the first six months; Arch Coal [ACI] was off 26 percent after first-half gains of 67 percent.

Lower oil prices explain some of the fall. You also can blame hedge funds that use a momentum investing strategy, says Steven Marascia of Anderson & Strudwick in Richmond, Va. Momentum investors basically place bets on companies with rising stock prices and strong earnings and sell them when they run out of steam. Mr. Marascia says hedge funds that did that with coal stocks have fallen out of love with the sector despite forecasts of strong demand and pricing for the commodity.

"The market is still dominated by momentum players," he said.

Some coal operators caught up in the industry's consolidation have bucked the trend in recent weeks. They include Alpha Natural Resources [ANR], an Abingdon, Va., producer that's received a $10 billion offer from Cleveland-Cliffs [CLF]. Alpha's shares jumped 6 percent Friday on speculation that Arcelor Mittal, the world's largest steel producer, may counter Cliff's bid.

Merger speculation and environmental issues aside, many in the industry believe that a forecasted supply/demand imbalance provides the basis for long-term optimism. They say booming demand in China, India and other Asian markets will create export opportunities for U.S. producers.

Mr. Harvey said, "Global energy demand still favors this higher pricing environment for the foreseeable future." Consol expects to mine the same amount of coal as previously forecast through 2010 and raised estimates of what the coal would sell for over that period.

Massey Energy [MEE] Chairman and CEO Don Blankenship says after talking with customers recently he's "convinced that the world's need for coal will continue to grow at a rapid rate."

Richmond-based Massey had issues of its own during the quarter, posting a loss of $93.3 million thanks to a pretax charge of $245.3 million related to litigation with Wheeling-Pittsburgh Steel. Excluding that, profits would have been a record $92.2 million, vs. earnings of $34.9 million in the year-ago quarter.

Analysts share Mr. Blankenship's optimism. They believe that the correction has put coal stocks on sale. "Our outlook for coal is bullish both in the near and long term," Neil Malkin of Zacks Equity Research wrote in a July 25 report.

Following Consol's subpar performance, Citigroup analyst John Hill maintained his "hold" rating on Consol and reduced his target price from $115 to $88.

"We see extreme negative market reaction to the quarter as over-blown and over-done," Mr. Hill wrote in a note to clients.

Friedman, Billings, Ramsey analyst David Khani also cut his target price on Consol to $137, down from $153.

"We still see significant value in the sector and would be buyers of this sharp pullback," he advised clients in a July 28 note.

Investors unnerved by King Coal's retreat and Consol's miscues may find the optimism hard to swallow. When Consol's shares are priced at $88.50 one day and close at $67.85 two days later, any one convinced they know what they'll be worth Monday -- much less six months or a year from now -- is either very smart or very crazy.