Non-Integrated refiners look promising!

People are always asking me if I’m finding anything interesting to buy. Their inquiry is always aimed at owning stocks that will increase in value. My answer has mostly been, NO. I continue to believe the economy is weak, the rest of the world will follow, and either inflation or credit concerns will push bond prices lower and yields higher. I don’t see a broad stock market rally that lasts. To believe that, you have to believe that governments solve problems. I don’t, so my view is government meddling will prolong the malaise that we will endure. As I’ve opined before, we aren’t going into a depression, but it will be a period where a person is satisfied with holding a net worth together and the accepted view of a good return is much, much lower than the one we learned to expect in the 1990s. That’s why I viewed the Wrigley opportunity as such a great gift. A “riskless”, above market return!

Before I write about the one long position that has interested me, besides Wrigley, I’ll spend a paragraph confessing my losses in Flowers Industries [FLO]. I may have written about this, I didn’t bother to check, as I thought the company was a worthy negative bet. To set the scene, FLO makes bread and is a heavy user of flour, veg oils, and diesel fuel among other commodities. All of their competitors had been selling well off their 52 week highs and were reporting lousy earnings for the latest quarter due to the above. FLO continued to trade at an all-time high. My bet was that rapidly rising commodity prices would affect this baker as well as its competitors and like companies. I bought a largeish number of puts the day before earnings were to be announced and would either make a nice profit if their results tanked or would suffer a small loss if they managed to do better than the prior year. Well they blew away the analysts expectations, raised guidance significantly, and then increased the dividend by 20%. A trifecta of pain! The stock went up so fast I couldn’t get out of my puts with only minor suffering and am now hoping for a major miracle befor mid June when they expire. In essence, based upon current pricing, I will lose all of my premium. I was too smart for my own britches. The wallet now fits into the back pocket of those britches better as it is lighter.

Now, after that confession, I’ll mention the stock that has earned back my FLO losses plus a decent amount in the past several weeks. Tesoro [TSO] is a refiner with some service stations. It trades like a refiner, not an integrated oil company. It was killed by the spike in crude oil as it couldn’t raise gas prices as fast as oil was jumping. Earnings were terrible and the stock dropped like a rock, as did all refiners. It has made a nice move, but can still be bought today at very reasonable multiples of cashflow.

I liken non-integrated refiners to commercial banks. Banks make more money when rates fall than they do when they rise as they are able to lag the market downward. Refiners will react the same way. As the price of their crude inputs decrease, they will sandbag the price of gas. The result is exploding profits which are fair as they have sure had exploding losses as crude raced upward. Those margins are already expanding and that has driven the share prices upward. The obvious bet here is that oil has stopped spiking and will either decrease more or increase at a slower pace. Either will be favorable to TSO. If we get rapid spikes again then refining will be no better than a bakery.

As I continue to evaluate the wiseness of this long position, Wrigley and inverse bonds are earning me good returns and, as of late, negative bets have been good-but that seems to always change.

I’ve been working on a list of stocks that I want to buy a year or so from now, but that may be another post.