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