With oil still around $140 a barrel, some of the world's biggest hedge funds are now quietly betting on a turnaround... by stocking up on beaten-down U.S. refinery stocks.
* Bruce Koyner's $12 billion hedge fund just increased its shareholdings in six refiners, including Valero, Tesoro and Philadelphia-based Sunoco Inc.
* Citadel, a $22 billion hedge fund quietly sequestered an incredible 192,610 shares of Tesoro... and increased its stake in Holly almost eightfold to 190,681 shares in the first three months of 2008.
* Renaissance, a $30 billion fund just bought 609,888 shares of Valero and increased his stake in Calumet by 5.3% to 32,000 shares.
* Leuthold, an investment and research firm that oversees about $5 billion began buying refiner shares in June on speculation oil will drop to about $110 a barrel.
But it's not just hedge funds that are betting top dollar on a turnaround in crude oil prices…
Refinery executives are buying more of their own stock than at any time in the past eight years!
Oil and gas processors have experienced a 40% decline in share prices since January – the largest drop since 1995 – after crude oil prices gained 43%.
That's not surprising when you consider that profits of U.S. refiners plummeted an incredible 98% in the first quarter after companies were unable to make up for higher crude prices with higher gasoline, heating oil and jet fuel prices.
But analysis of the money flow indicates that something's about to change in a big way.
You see, earlier this year, chief executive officers, directors and other senior officials had been dumping shares of oil refineries like there was no tomorrow.
After all, they knew that if oil prices were heading up, their margins would go down.
Suddenly, things have changed: Executives at 10 refiners gobbled up $2 million of their own companies' shares in May... that's twice the amount they sold!
* Tesoro director John Bookout III increased his insider stake by 58%.
* Calumet Specialty Products Partners CEO William Grube bought 50,000 shares in May, his first purchases since the company went public in January 2006, according to the data.
But one company's management has been buying up shares at an unprecedented clip:
* This company’s Executive Chairman of the Board bought 53,000 shares of his company for $727,250... at between $12.43 and $14.74 a share...
* Even better, the refiner's parent company acquired a whopping 880,000 shares for $11.4 million... paying between $12.03 and $14.79 a share
Now... insider buying is typically a good indicator. But betting on lower oil prices alone would not be sufficient for us to recommend this stock... even though right now, you can buy it for under $14.
The thing is, this company's stock price has been depressed artificially since February due to an incident at one of its plants that knocked out part of its capacity.
An estimated 70% of the company’s consolidated EBITDA was produced by this very facility in 2007.
It is now working at 50% of capacity... but the company estimates it will be back online in late July.
There is another catalyst that will propel this company's stock price in the very near future... but more on that in a second.
20 years and counting
Now, I’ve been in this business for a long time – 20 years, in fact – and I’ve seen some rotten market conditions.
(Anyone remember ’91? How about ‘01?)
I’ve carefully researched this market. In fact, in my book Hot Trading Secrets, I predicted a dramatic downturn just like this.
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My approach was and is straightforward: Provide my readers with profitable investment and trading recommendations.
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Companies like a small biotech firm that specializes in diagnostic products for the world’s aging population. And the company’s scientists have developed a very simple, painless, accurate and cost-effective test that aids doctors in the diagnosis of a debilitating disease that afflicts an estimated 5.1 million folks in the U.S. alone. This includes 4.9 million people age 65 and older.
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Most impressive, given the incredible size of the market for the test alone, is that this company's stock is still trading below $5 a share – way below!
You can learn more about this stock in our Special Research Report, 3 Recession-Busting Stocks You Need To Buy Now. I'll tell you more about that in just a moment...
Finding our "damn good stocks" is one thing. Getting the timing just right is quite another...
Actionable profit guidance
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But let's get back to our contrarian oil play...
You remember... the stock that had been beaten down after an "incident" at its most productive facility last February. The stock that the offshore parent company is spending millions of dollars to repurchase at $12... even $14 a share. And whose chairman of the board has been accumulating tens of thousands of shares under the radar.
Now, even this high-level insider activity wouldn't be sufficient to classify this stock as a "GDS"... a "damn good stock".
There is another catalyst that could send the stock price soaring in the very near future.
You see, the company has just completed the acquisition of another facility, which will increase its output by another 50%!
The stock is currently trading at a 73% discount over its July 2007 high. We give it a conservative 67% upside by November.
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