Jim Simons Exits Alliance Resource Partners

The company's operating margin has been in long-term decline, inventory is building up and coal is a very volatile commodity

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Dec 20, 2016
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Guru Jim Simons (Trades, Portfolio) founded Renaissance Technologies in 1982. He ran the hedge fund for 28 years before retiring in 2010. He is now a nonexecutive chairman at the firm.

Renaissance is one of the first highly successful hedge funds to use quantitative trading— known as "quant" investing. They rely on powerful computers and algorithms to guide investment strategies.

Since stepping down from his leadership role in 2010, Simons has focused more of his attention towards philanthropy and improving the world.

During the third quarter, Simons' firm exited its position in Alliance Resource Partners (ARLP, Financial).

Alliance Resource Partners is a diversified producer and marketer of coal with significant operations in the eastern United States. The company is the second-largest coal producer in that region. As of Dec. 31, 2015, the company had approximately 1.8 billion tons of coal reserves in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia.

Alliance Resource Partners has 10 underground mining complexes in Illinois, Indiana, Kentucky, Maryland, and West Virginia. As of Feb. 11, Alliance Resource Partners had 2,955 employees.

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Alliance Resource Partners has a market cap of $1.77 billion, a price-earnings ratio of 12.43, an enterprise value of $2.52 billion and a price-book ratio of 1.73.

According to GuruFocus, Alliance Resource Partners has a 5 of 10 financial strength rating with a cash-debt ratio of 0.03 and an equity-asset ratio of 0.46. The Piotroski F-Score of 5 indicates its financial situation is typical for a stable company.

Alliance Resource Partners also has a 7 of 10 profitability and growth rating with an operating margin of 12.74%, a net margin of 14.83%, a return on equity (ROE) of 14.64%, a return on assets (ROA) of 12.18%, three-year revenue growth of 3.60% and EPS growth of -11.70% over the previous three years.

GuruFocus has detected three severe warning signs which may have influenced the firm's decision to close the position in Alliance Resource during the third quarter.

  • The company’s operating margin has been in five-year decline. The average rate of decline is -3.8% per year.
  • The company’s days inventory is building up. If a company builds up inventory, it could mean that it is having difficulties selling its goods.
  • The company’s asset growth is faster than its revenue growth. If a company builds assets at 14.8% a year, faster than its revenue growth rate of 7.1% over the previous five years, it means that the company may be becoming less efficient.

The algorithm may have decided that it was time to cut losses with Alliance Resource Partners because the firm was down by an estimated 20% with the investment in the company. Renaissance entered the position in the first quarter of 2011. Coal is also a very volatile commodity, as the chart below shows.

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Chart taken from the U.S. Energy Information Administration.

Coal production and consumption has been in decline over the past two years. Simons' firm may have decided that coal is a high variance investment, which may have lead to the decision to eliminate Alliance Resource Partners from the portfolio.

Disclosure: Author does not own any shares of this company.

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