Is Alliance Resource Partners, L.P. (ARLP) A Good Stock to Buy?

The worries about the election and the ongoing uncertainty about the path of interest-rate increases have been keeping investors on the sidelines. Of course, most hedge funds and other asset managers have been underperforming main stock market indices since the middle of 2015. Interestingly though, smaller-cap stocks registered their best performance relative to the large-capitalization stocks since the end of the June quarter, suggesting that this may be the best time to take a cue from their stock picks. In fact, the Russell 2000 Index gained more than 15% since the beginning of the third quarter, while the Standard and Poor’s 500 benchmark returned less than 6%. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Alliance Resource Partners, L.P. (NASDAQ:ARLP).

Alliance Resource Partners, L.P. (NASDAQ:ARLP) shares didn’t see a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 7 hedge funds’ portfolios at the end of the third quarter of 2016, same as at the end of June. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY), Alder Biopharmaceuticals Inc (NASDAQ:ALDR), and Steelcase Inc. (NYSE:SCS) to gather more data points.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs. We launched this strategy 2.5 years ago and it returned more than 39% since then, vs. 22% gain registered by the S&P 500 ETFs.

What does the smart money think about Alliance Resource Partners, L.P. (NASDAQ:ARLP)?

At the end of the third quarter, a total of 7 of the hedge funds tracked by Insider Monkey were long this stock, unchanged from the second quarter of 2016. The graph below displays the number of hedge funds with bullish positions in ARLP over the last 5 quarters, which has been nearly flat in 2016. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Magnolia Capital Fund, led by Adam Peterson, holds the number one position in Alliance Resource Partners, L.P. (NASDAQ:ARLP). Magnolia Capital Fund has a $35.9 million position in the stock, comprising 19.7% of its 13F portfolio. Coming in second is Impala Asset Management, led by Robert Bishop, which holds a $7.9 million position. Remaining members of the smart money that hold long positions encompass Bernard Selz’s Selz Capital, Mitch Cantor’s Mountain Lake Investment Management, and Matthew Hulsizer’s PEAK6 Capital Management. We should note that two of these hedge funds (Impala Asset Management and Mountain Lake Investment Management) are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-micro-cap stocks.

Seeing as Alliance Resource Partners, L.P. (NASDAQ:ARLP) has gone through falling interest from the aggregate hedge fund industry, it’s easy to see that there were a few hedge funds who sold off their entire stakes by the end of the third quarter. Intriguingly, Renaissance Technologies, one of the largest hedge funds in the world, cut the largest position of the 700 funds studied by Insider Monkey, totaling an estimated $2.4 million in stock. Joshua Packwood and Schuster Tanger’s fund, Radix Partners, also sold off its stock, about $0.3 million worth.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Alliance Resource Partners, L.P. (NASDAQ:ARLP) but similarly valued. We will take a look at Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY), Alder Biopharmaceuticals Inc (NASDAQ:ALDR), Steelcase Inc. (NYSE:SCS), and Sabra Health Care REIT Inc (NASDAQ:SBRA). This group of stocks’ market valuations are closest to ARLP’s market valuation.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $221 million. That figure was $57 million in ARLP’s case. Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) is the most popular stock in this table. On the other hand Sabra Health Care REIT Inc (NASDAQ:SBRA) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Alliance Resource Partners, L.P. (NASDAQ:ARLP) is even less popular than SBRA. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock.

Disclosure: None