HollyFrontier: Refined Gains

09/18/2013 7:00 am EST


John Reese

Founder and CEO, Validea.com And Validea Capital Management

We select stocks based on the known investing strategy of select legendary investors. This stock idea scores a 100% rating based on the approach of value investor Benjamin Graham, by John Reese, editor of Validea.

HollyFrontier (HFC) is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt.

To meet the Graham criteria, the stock can be neither a technology nor financial company, and therefore this methodology is applicable.

Under this approach, the investor must select companies of adequate size. This includes companies with annual sales greater than $340 million. HFC's sales of $20,358.9 million, based on trailing 12 month sales, pass this test.

The current ratio must be greater than or equal to two. Companies that meet this criterion are typically financially secure and defensive. HFC's current ratio of 2.37 passes the test.

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization.

The long-term debt for HFC is $990.2 million, while the net current assets are $2,568.5 million. HFC passes this test.

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last five years.

Companies with this type of growth tend to be financially secure and have proven themselves over time. HFC's EPS growth over that period of 1,416.3% passes the EPS growth test.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last three fiscal years, must be moderate, which this methodology states is not greater than 15.

Stocks with moderate P/Es are more defensive by nature. HFC's P/E of 8.60 (using the 3-year PE) passes this test.

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. HFC's Price/Book ratio is 1.45, while the P/E is 8.60. HFC passes the Price/Book test.

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