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Company name Alliance Resource Partners, L.P.
Stock ticker ARLP
Live stock price [stckqut]ARLP[/stckqut]
P/E compared to competitors Good

MANAGEMENT EXECUTION

Employee productivity Poor
Sales growth Good
EPS growth Poor
P/E growth Poor
EBIT growth Good

ANALYSIS

Confident Investor Rating Fair
Target stock price (TWCA growth scenario) $59.46
Target stock price (averages with growth) $55.91
Target stock price (averages with no growth) $47.61
Target stock price (manual assumptions) $53.56

The following company description is from Google Finance: http://www.google.com/finance?q=arlp
Alliance Resource Partners, L.P. (ARLP Partnership) is a diversified producer and marketer of coal primarily to major United States utilities and industrial users. ARLP Partnership operates 10 underground mining complexes in Illinois, Indiana, Kentucky, Maryland, and West Virginia, including the new Tunnel Ridge mine in West Virginia. The Company is constructing a new mine in southern Indiana, operate a coal loading terminal on the Ohio River at Mt. Vernon, Indiana and are purchasing and funding development of reserves, constructing surface facilities and making equity investments in White Oak’s new mining complex in southern Illinois. It also constructing a new mine in southern Indiana, operate a coal loading terminal on the Ohio River at Mt. Vernon, Indiana. Its mining activities are conducted in three geographic regions: Illinois Basin, Central Appalachian and Northern Appalachian regions.

 

Confident Investor comments: At this time, I think that a Confident Investor can cautiously invest in this stock as long as the price is correct. Most of the fundamentals of this company are good but there are some concerns.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.

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I must admit that I have been guilty of violating this principle that is taught by Barry Ritholtz. I recently read his great article that analyzed the impact that politics and economics has on investment community. It was enlightening to me and I encourage you to click through to the article and read it.

Economic issues

Barry points out that most economic issues are either estimates or such long-term trends that they have very little impact on specific stocks.  He quotes Warren Buffet: “If you knew what was going to happen in the economy, you still wouldn’t necessarily know what was going to happen in the stock market.”

Political issues

Barry points out that politics has even less of an impact on the market. He points out that the markets wobbled a bit for various political panics. He also points out that within a short time the previous trends continued as if the politicians didn’t matter.

Interesting that if the market spiked or dropped during those politically sensitive times the only ones that probably made or lost money were the ones that worried about the event. They also probably just took money away from each other and not from the steady investor that sat back and didn’t panic.

Personally, I know that I have been guilty of worrying about political issues. I thought for sure the market would react badly to the fiscal cliff at the beginning of 2013. I pulled all of my capital out of the market except for my free shares (read my book, The Confident Investor, to learn how to get free shares of stock). Nothing essential happened to any of my Watch List stocks during the fiscal cliff. Granted, I didn’t lose money but I am sure that I lost the opportunity to make more money. Bad mistake on my part that I won’t be repeating in the future.

I don’t wish to regurgitate all of the great points that Barry made – go over and read his article. He makes excellent points on ignoring these two issues.

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Company name Advance Auto Parts, Inc.
Stock ticker AAP
Live stock price [stckqut]AAP[/stckqut]
P/E compared to competitors Fair

MANAGEMENT EXECUTION

Employee productivity Poor
Sales growth Poor
EPS growth Good
P/E growth Poor
EBIT growth Fair

ANALYSIS

Confident Investor Rating Poor
Target stock price (TWCA growth scenario) $74.48
Target stock price (averages with growth) $89.57
Target stock price (averages with no growth) $75.82
Target stock price (manual assumptions) $74.81

The following company description is from Google Finance: http://www.google.com/finance?q=aap

Advance Auto Parts, Inc. (Advance) is a specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. The Company operates in two segments: Advance Auto Parts (AAP), and Autopart International (AI). Its stores carry an extensive product line for cars, vans, sport utility vehicles and light trucks. The Company serves both do-it-yourself (DIY), and do-it-for-me (Commercial), customers. Its Commercial customers consist primarily of delivery customers for whom the Company delivers product from its store locations to it Commercial customers’ places of business, including independent garages, service stations and auto dealers. In December 2012, the Company acquired B.W.P. Distributors, Inc.

 

Confident Investor comments: At this price and at this time, I do not think that a Confident Investor can confidently invest in this stock.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.

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Company name Reynolds American, Inc.
Stock ticker RAI
Live stock price [stckqut]RAI[/stckqut]
P/E compared to competitors Good

MANAGEMENT EXECUTION

Employee productivity Good
Sales growth Poor
EPS growth Poor
P/E growth Good
EBIT growth Poor

ANALYSIS

Confident Investor Rating Fair
Target stock price (TWCA growth scenario) $43.57
Target stock price (averages with growth) $44.53
Target stock price (averages with no growth) $34.43
Target stock price (manual assumptions) $38.83

The following company description is from Google Finance: http://www.google.com/finance?q=rai
Reynolds American Inc. (RAI) is a holding company. The Company’s operating subsidiaries include cigarette manufacturer in the United States, R. J. Reynolds Tobacco Company; the smokeless tobacco products manufacturer in the United States, American Snuff Company, LLC (American Snuff Co); the manufacturer of cigarette brand, Santa Fe Natural Tobacco Company, Inc. (SFNTC), and Niconovum AB. RAI operates in three segments: RJR Tobacco, American Snuff and Santa Fe. The RJR Tobacco segment consists of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. Santa Fe manufactures and markets cigarettes and other tobacco products under the NATURAL AMERICAN SPIRIT brand. On February 28, 2011, RAI completed the sale of Lane Limited.

 

Confident Investor comments: At this time, I think that a Confident Investor can cautiously invest in this stock as long as the price is correct. Most of the fundamentals of this company are good but there are some concerns. This is the type of company that some people would prefer to not invest in due to its reliance on revenue from tobacco products. I do not think you should invest in a company if you are morally opposed to its products.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.

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I am regularly asked about the indicators that I use in my investment strategy. To refresh your memory, GOPM (Grow on Other People’s Money) is the strategy that I teach in my book, The Confident Investor. It has a couple of main tenets:

  1. You should only invest in truly Good Companies.
  2. You probably do not have enough money to have a balanced portfolio of “buy-and-hold” positions in truly Good Companies.

To get around the realities of the second tenet, I have developed a trading methodology to help. This methodology allows you to invest in companies that are currently experiencing a bull market. It also avoids those that are in a bear market. Almost all companies experience times when their stock price drops. This means that you have your money invested when the stock is going up, and it is invested elsewhere when the price is falling.

For the balance of this article, I am going to explain why I have modified some standard indicators. These indicators help to signal the bull and bear action of the stock. This explanation will only be available for registered owners of my book, The Confident Investor. If you own the book, you can register and log in to see the balance of this article. If you don’t own the book, you can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad. [s2If current_user_can(s2member_level1)]

The three main indicator types that I use are EMA, RSI and MACD. I suggest you set these indicators to use a multiple of 5 in the analysis. If you read some of the theory behind these indicators and the original math from the creators, you will find that none of them use a multiple of 5 as I suggest. My reasoning is important to understand.

In nearly every case of common usage, the popular value is larger than 5. In the case of RSI, it is 14. In the case of MACD, it typically is 12/26/9 (for the three different signal lines). In the case of EMA, you will often see values as high as 50, 100 or even 200. In my case, it is always 5, 10 or 20.  Why do I suggest a different time frame for all of these?

First let’s look at EMA of 200 or 100.  There are 250 trading days in a year or about 21 trading days in a month. This means that EMA(200) and EMA(100) are basically telling you if the stock has moved up in value for the past 10 or 5 months, respectively. This has almost no relevance if you are trying to decide to buy that stock today, tomorrow, or next Tuesday. The time frame that is relevant to that decision is this week or this month but not 5 months ago.

If you are trying to decide to buy today or not buy today, you need to look at what is happening now versus where the stock was a few days ago. There are 5 trading days (or bars) in a typical week (assuming no holidays). There are 10 days in 2 weeks and about 21 in a month. What is happening within the last week is very relevant. This week is more relevant than what happened 2 weeks ago which in turn is more relevant than what happened last month this time.

Most government indicators e.g. inflation rate, unemployment, etc. are on a monthly basis. By looking at 20 trading days, we are including a full cycle of most government indicators but not two or three. This is important as we want to make a decision based on what is happening now and not in history.

Not insignificant in this timing analysis is that the stock market is incredibly quarterly driven. Looking at a metric that is longer than a quarter is simply not relevant for understanding how most professional investors, mutual fund managers, and company executives are paid. They are paid to influence and capitalize on immediate returns.

Once you are comfortable with the concept of what is happening this week in a stock, you can quickly get comfortable with a 5 day increment. From that basis, it is easy to jump to 10 and 20.

Finally, it is important to remember that these three indicators were originally built in a different era. These indicators were developed when trades were in fractional increments of 1/8 rather than our current system of pennies. This means that stock movement was not nearly as fluid. A stock would jump by 12.5 cents per increment where today it moves in increments of 1 cent. That change in increment calls into question the original logic of the creating mathematician in suggesting the default time frame. Combining that change with the accelerated decision-making of the Information Age and a much larger marketplace, implies that a shorter time frame is necessary.[/s2If]