Why I Bought Alliance Resource Partners

I bought ARLP yesterday afternoon at what I hope will turn out to be a good entry point. This stock was first discussed in the blog on November 27. I was pleased to see that Michael Kaye of Standard & Poors Equity Research agrees that Alliance offers a good value. After running a screen to find stocks with a PEG ratio below 1, a dividend yield above 2.6%, and return on equity exceeding 25%, Kaye came up with ARLP and four other energy stocks: BP PLC (BP), Global Partners (GLP), Precision Drilling (PDS), and Suburban Propane (SPH).

I might add that in addition to being a cheap stock with good earnings, Alliance has an above average rate of dividend growth with a reasonable payout ratio. The fundamentals look good to me as well. Coal prices have been firming, demand from utilities has been high, and railroads have been struggling to keep up.

I am already overweight in the energy sector and Alliance, a coal stock, has a little more beta (1.04) than I want to take on at this point in the market cycle. I equalized these factors by selling twice as much XOM from the portfolio. I am not bearish on XOM but it does appear overbought on a short-term basis. Since ARLP is yielding 5.6% and XOM 1.7%, portfolio income will actually increase as a result of this adjustment.

The on-balance volume plot suggests that this stock is under accumulation. There has been some insider buying this fall. The risk-reward ratio looks attractive here, and I expect ARLP to do very well over time.

ARLP 1-yr. chart

Comments

[Greg Pinelli:]

An interesting coal alternative that has some characteristics which might make it a profitable investment...attractiv... financials...20+ years of production from the current reserve base..a ready form of transport for its coal...locked in end users....I personally like equities that have enogh heft to compete and profit but are slightly under the radar.

2006 Dec 17 10:46 AM