CVR Energy (CVI)

CVI owns scarce and valuable inflation protected hard assets and possesses significant (yet overlooked) earning power over the next 2-3yrs and beyond. A handful of catalysts in the near future should help the market come to it's senses over the next year or so, providing investor's who purchase at or around today's price significantly above average returns on invested capital (while incurring a below average level of risk in the process).

The most imminent of these catalysts is the spin-off of one of this countries most valuable nitrogen fertilizer assets into a tax advantaged MLP structure. The purpose of this offering is to highlight the value of an overlooked segment of their business (which is currently being significantly undervalued by energy investors)...not to dispose of a non-core asset or to raise capital for the refinery business (it's other primary business division). Management understands the value of what they own and have chosen to highlight this value through the public markets.

Regarding the above, it is interesting to note that management has chosen not to spin out the fertilizer business to existing shareholders, but has chosen to sell a stake ( of roughly 20%) directly to new shareholders. This will ensure that the newly issued securities end up in the hands of those investors that value them the most (yield seeking MLP investors).

Additionally, by selling a direct stake to yield seeking investors management will avoid any overhang issues that would ordinarily occur if they had chosen to spin out their fertilizer business to existing shareholders. By removing the potential for mindless selling to temporarily depress their new issues stock price, current owners of CVI should realize a more appropriate valuation for this business relatively sooner than would be the case otherwise.

Other pertinent info...

70% of CVI's outstanding shares are owned by 2 firms, Goldman Sachs and Kelso & Co., both of which had a hand in CVI's recent IPO. Considering that both firms have held onto their shares since its intial public offering, in my opinion, indicates that they believe CVI is worth considerably more than what it is currently trading hands for. Goldman and Kelso's recent purchase of the GP interest (for the fertilizer segment) is another indicator that management has properly aligned themselves with shareholders, and is planning to be around for the long haul.

With CVI, as well as all "special situations," it helps to understand the actions and incentives of insiders when determining wether or not this business merits a portion of my hard earned capital. In my opinion, taking the time to analyze and evaluate these issues during the DD process can (and most often does) provide meaningful insight into the opportunity at hand...it certainly has in CVI's case. Aligned incentives and intelligent actions by management, taken together, make this hidden asset play a wise bet in my opinion.

The bottom line is that at current prices there appears to be a minimal chance of permanent capital loss, and significant upside potential driven by a combination of factors (a combination I love to see). I believe this dynamic is likely to push CVI's current share price meaningfully higher over the next few years.