A Refiner in Focus: HollyFrontier Corp (HFC)

I am just getting around to posting this after being sick with a dreadful case of Tonsillitis. I have been out of commission for nearly five days now and wouldn’t wish these symptoms upon anyone. Anyhow, I wanted to talk about a company which I added to my portfolio, HollyFrontier Corporation (ticker: HFC).

HollyFrontier is a mid-cap company based in Texas that refines petroleum into several different products, including gasoline. If you aren’t already aware, refiners have had a big run in the markets lately. This is mainly due to an increase in the domestic oil supply as well as a decrease in the amount of foreign oil being imported into the country.

At first I paid little attention to the refiner stocks, as I wondered at first if they were  all overbought after getting so much media attention. That was before I started really looking into the fundamentals. While all the refiners continue to show promise, I believe HollyFrontier stands out from the crowd in terms of valuation. Comparing HFC to its peers, its P/E and P/B ratios, revenue and earnings growth, net and operating margins, and debt levels set it apart as still quite undervalued in my opinion. Compare these numbers to the large-cap refiner Valero (VLO) with a P/E ratio in the 20′s, worrisome margins and debt levels.

Based on these figures alone, I think it is clear that HFC still has room to run. This would be great for me, as I jumped onboard the refiners bandwagon a bit late, but as it stands I have still repeaded some pretty sweet profits from this stock.

Refiners and commodity-based stocks strike unwarranted fears into the hearts of many investors. While refiner stocks do have a history of being volatile due to underlying commodity prices, they also have a long history of putting fat stacks of cash into the pockets of investors.

Disclaimer: I am long HFC

New Trade (AMRN) and an Overview of Speculation for Investors

I wanted to take a moment and write up a quick post that touches on two topics: the hotly debated issue of whether to hold speculative stocks in your portfolio and also details on the latest addition to my portfolio.

Speculation

Speculative stocks are those which aren’t necessarily attractive due to current valuations or earnings, but instead have the potential for large future growth that makes them attractive to many.

Strictly speculating in the market is a complete waste of time and money in my opinion. For The idea of investing is to hold companies that you believe will outperform based on great valuations and proven earnings growth. If you want to make money choosing stocks or investing in general, you had better make sure you understand what it is you are investing in, and choose your stocks based on your own research. However, imagine if you had speculated on Apple back when it was selling at less than $10 a share! If you had bought 100 shares of Apple back in 2003 (when it was trading around per share) and sold them today, you would have made around $45,000 depending on the exact price you got in at. That’s not a shabby return for a roughly $700 investment! In fact, your realized rate of return would be over 6,000%.

Being Realistic

Let’s be real for a minute though. As I always say, hindsight is 20/20 when it comes to investing. In fact, Many people would have probably thought you were insane to invest in Apple at the time, as it had been through an enormous decline during the “Tech Bubble” and had also been showing little signs of a sustained recovery. For a good visual of what this looked like, just check out the chart I have linked here: Apple Price Chart.

For those who got in on Apple early, it has become the trade of a lifetime if they held on long enough. That is the type of trade all investors dream about. The fact is however, that trades such as this are next to impossible to be confident about when they are made! If they were easy to predict, the stock price wouldn’t be nearly as low and future growth would already be priced in. Essentially, these are what garden variety growth stocks are. By the time the market fully realizes their potential, you can’t really argue that they are very “speculative.”

The kind of speculative stocks that seek to pay off enormously in the long run usually involve a great deal of risk. Personally, I would never allocate more than 10% of my portfolio towards these ventures. The fact is that most speculative stocks fail to shine the way investors want them to. Often times these are small-cap technology or pharmaceutical companies that get swallowed up by debts, fall by the wayside due to mismanagement, or they fail to market themselves effectively to the market as well as to the consumers who would potentially use their goods or services.

My Strategy

As far as my personal strategy goes, I choose to set aside a small portion of my overall investment capital for speculative stocks. I believe it is imperative to look at a company’s history and thoroughly research the underlying fundamentals before committing any money to a particular investment. The problem for speculative companies is often times the balance sheet where they may have large debts due to start-up or marketing capital. This is something I think can be temporarily overlooked for many speculative stocks, as a successful product should create more than enough money to repay any such debts in a timely manner if the pricing and margins are good.

My personal opinion is that once you have decided how much to allocate to a specific speculative stock, you should buy in at a good entry point and then leave it alone!

This part of you portfolio needs to thought of as separate from the rest. These stocks can have quite large price swings, and considering speculative plays as part of your overall portfolio may be discouraging if they don’t pay off as soon as you might like. When comparing your overall performance to indexes such as the S&P 500, remember to factor in your speculative plays if you can’t figure out why you are lagging behind in terms of returns. If these speculative plays wind up bringing in big bucks, you will be glad that you didn’t sell them just because they caused you to under-perform the S&P for a year or two. If your speculative plays are small in comparison to your overall account size, your under-performance due to these stocks should be relatively minimal anyhow.

My Pick

I have chosen one company to add to my portfolio that is a speculative play but also one that can be considered a small-cap growth stock, Amarin Corporation (AMRN). I chose this particular company because it is a promising pharmaceutical company that already has a decent amount of market buzz in the media, has a new FDA approved product now available for prescription (Vascepa), and is trading near the bottom of its 52-week range. Check out this one-year price chart from my Thinkorswim platform:

AMRNChart

As evident in the chart, the current level the stock trades at is historically quite low and has room for a great deal of potential upside.

Vascepa is Amarin’s new and only prescription drug available on the market. It touts itself as the “First FDA Approved EPA only Omega-3.” Vascepa is an important product development because it provides all of the benefits of other Omega-3 fish oil products while not increasing levels of LDL-C unlike its competitor Lovaza (LDL-C is known as a “bad cholesterol”.) Most analysts are extremely bullish on the stock as well as the future of the company overall as the mean price target for the stock is around $18.50 with a  +120% potential upside. The company also has a significant following at the Motley Fool as well as other popular investment websites and forums.

The current waiting game Amarin investors are involved in is waiting for the FDA to announce whether Vascepa will receive New Chemical Entity or “NCE” status. If it does, this would allow strict protection against generic formulations of its fundamental compound for five years. This would guarantee a longer period of market exclusivity and obviously be a positive for potential companies looking to either partner with or perhaps buy-out Amarin. This is something that Amarin investors are quite familiar with, as there have been several delays in receiving  a decision on NCE status since the drug’s approval by the FDA last summer. This is a stock many people will be watching closely this quarter.

Conclusion

Amarin’s future, like that of any other stock’s, is uncertain. Being a speculative play on a new drug, a clear view of the stock’s future is even more difficult to ascertain. However, this company has the potential to make a significant impact in the medical community if it can market itself appropriately. There is a lot of speculation as to whether Amarin will be bought out by one of the big pharmas. Rumors about a potential buyout by pharmaceutical giant AstraZeneca have been circulating for a few months. Only time will tell what is to happen. The fact is though, that a company such as Amarin could be extremely profitable for investors, regardless as to whether a takeover occurs. Receiving a definitive decision regarding NCE status will also be instrumental in how the market prices Amarin in 2013 as well as increasing its attractiveness as a takeover target. I have dedicated a small sliver of my portfolio to this stock, and will be holding steady to see what happens. If Vascepa becomes a big success and Amarin isn’t bought out, we might very well see other successful products being developed which will lead the way for large future growth.

Disclaimer: I am long shares of Amarin