Investor Essentials Daily

This refiner now brings gas all the way to your car

May 2, 2023

It is not uncommon for companies to undergo transformations to be more profitable and make more money.

However, it is difficult for the market to forget about the legacy business and only focus on the new story. That is why investors miss these opportunities.

We see a similar story today with HF Sinclair (DINO). After acquiring all the gas stations and convenience stores of the Sinclair oil business, the company has seen big synergies.

It continues to grow this marketing business and enjoys controlling the supply chain from the ground to the end customer.

And yet, the market misses the story and prices the stock to be the same commodity business it always was.

That is why HF Sinclair showed up on our screen. Its high returns and the market’s misunderstanding of its sustainability make it a great FA Alpha 50 name.

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Companies sometimes see opportunities to be higher-efficiency and higher-profitability businesses. This may be through acquisitions or an internal transformation. 

Ultimately, when this happens, the management focuses on the new area, slowly leaving the legacy business behind, and the market tends to be pessimistic about it.

The market sometimes questions the benefits of the transformation, which leads the company to publicly discuss the advantages. 

They talk about the benefits of such transformation to all the related parties: shareholders, lenders, customers, and sometimes even the suppliers.

Yet, we have repeatedly seen that it takes a lot of time for the market to realize this.

There are always risks with new growth plans, and executions may not be as smooth as expected. This results in the market assuming the business is the same old one until nearly everything is done.

We see a very similar story today…

HollyFrontier has been in the refining business for a long time. They own and operate refineries in the U.S., producing gasoline, fuel, and specialty products.

In March 2022, it officially transformed itself by acquiring the Sinclair oil business and was renamed HF Sinclair (DINO).

It took it from being a refinery and pipeline business to also having a retail marketing business. The most interesting part is that the company now has Sinclair-branded gas stations and convenience stores.

This means it now has the source, the means of production, and the stores where they sell the products. The company controls the whole supply chain from the ground to your car.

These are clear advantages of this integration. One thing that might not be as clear from an initial look is how good the marketing is as a standalone business.

Unlike refining and renewable diesel businesses, the convenience store and gas station business is a stable good 10%+ return on assets (“ROA”) business. This can be seen by looking at peers like Murphy USA (MUSA).

HF Sinclair has already been recovering from the pandemic year in 2020 when it had an ROA of only 1%. Last year, it quadrupled its net income thanks to surging energy prices, and ROA reached a massive 24%.

The company has the chance to build on this huge success with its transformation to a steady high-return business.

And yet, the market does what it always does. It is missing the story of this big change.

The stock currently trades at only 7.9x price-to-earnings (“P/E”) and price-to-book 1.1x (“P/B”), which are way lower than industry averages.

Considering the company’s investments to grow its stores and the outlook for more stable returns, these multiples do not reflect the business’s fair value.

The market is not pricing the company for its investments in growing those stores or its more stable returns.

That is why HF Sinclair showed up on our screen. Its high returns and the market’s misunderstanding of its sustainability make it a great FA Alpha 50 name.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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