uclayoda87 (30.65)

Western Refining: Is it time to make another speculative bet?

September 06, 2009 – Comments (5) | RELATED TICKERS: WNR , HOC , PDS

This company is relatively young and small.  It had a tough year and a half, with a 90% drop in its stock price, including a continued slide over the last few months, when most of the market saw big gains.  Other refiners have done better.  HOC saw a significant stock gain since July 09, which was probably due to its low debt and positive analyst recommendations.  WNR also saw a big fall in revenue from 2008 to 2009, but this now appears to be improving slightly.  The company also stopped paying a dividend, when their revenues collapsed and their debt went up.  Market Edge and Jaywalk Consensus rate WNR as Hold and Neutral.

So where is the good news?  There was a little insider buying a few months ago and little insider selling, but there has not been any major news event that would make this company a strong buy.  WNR had a couple of good days with a 3.9% gain on Friday, but its price is still less than $6.

Compared to other energy companies that I bought this year (PDS, CNQ), the refiners looked a bit ugly.  So why am I now looking at this stock to make a real buy?

I already have long positions in mining, energy, gold, silver, agriculture stocks, world REITS, and big dividend paying stocks which represent my buy and hold part of my portfolio.  I have not bought much in the last few months except for GLD and CEF on the transient pull backs that we have seen.  These purchases were more as an alternative to a money market fund, but more recently with the price of gold and silver going up, I have not bought anything and have just been raising cash, waiting for an October sell-off.  As the market has been bouncing in this trading range for the last few weeks, I started to consider the implications of deflation vs. stagflation on stocks which have not rallied from the March lows.  Since I believe that any deflationary period will be short-lived (less than 6 months) and that stagflation is the long-term trend, which may last years, I will assume stagflation to be the main business environment that these companies will operate in.  So again, why pick WNR?  First, refinery capacity is not likely to dramatically increase by speculative developers, so the current players and their production capabilities are likely to remain stable.  Buy why buy WNR over HOC?  HOC is definitely a safer bet since their debt is low and their revenue is stable.  Unfortunately, HOC stock price has already appreciated as predicted by UltraLong in his blog:

Nothing Could Be Finer, Than Buying A Refiner  June 26, 2009 –RELATED TICKERS: VLO , SUN , HOC.

WNR stock price has gone down since June, but now may be the time to buy.  Why?  Because it has a lot of long-term debt, which has kept its stock price low.  Since its revenue is likely to be stable or grow as a result of inflation, while its debt becomes less of a problem in future dollars, their profitability will increase dramatically, which will eventually be reflected in their stock price, when they achieve Cash-Cow status.  How long would you have to wait before cashing in?  Looking at how fast PDS and CNQ came off their lows once their news turned positive, I would guess that within 1 year you could see a 100% return on WNR if you were able to buy it at $6/share (currently $5.85).

So the last question that I have yet to answer for myself is if I should just buy this week or wait for another big sell off day before buying in?  I still believe that the market will have some major problems in October, so maybe buy half now and buy the other half in October, when I expect a significant market correction to develop.  If WNR goes way up by October, then I would not buy the second half and look for other opportunities.