Turning Lemons Into Lemonade (VLO)

My 435-day struggle with VLO came to an abrupt happy ending today.

435 days ago, I started buying VLO at $75.50/share.  I missed the all-time high by a quarter.  Ever since then, the stock started falling.  There is nothing worse than bagholding a stock.

But, in an amazing fast-paced change of events, I reversed my open positions into profitability in 3 days flat.

This is how the Open Positions ended up getting closed:

DaysHeld EntryPrice ExitPrice RealProfit PortfolioWeight TotalWeight
435      $75.50     $35.42     -53.05%      0.25%            0.25%
275      $65.50     $35.42     -45.89%      0.25%            0.50%
193      $55.66     $35.42     -36.36%      0.50%            1.00%
156      $48.20     $35.42     -26.53%      0.50%            1.50%
85        $42.63     $35.42     -16.94%      0.75%            2.25%
72        $37.61     $35.42       -5.84%      0.75%            3.00%
4          $31.28     $35.61    +12.71%     13.20%          17.25% (the big bet)

By looking at the RealProfit, it looks like I got my ass whipped.  But, the PortfolioWeight shows the all-important Bet Size.  In 4 days, I went from ass-kicked to ass-kicker.

Around 52 days ago, I posted my report about VLO:
http://www.atfreeforum.com/billyticketswin/viewtopic.php?mforum=billyticketswin&t=428&postdays=0&postorder=asc&start=40&mforum=billyticketswin

I was concerned about losses and whether or not I made a mistake.  When I get concerned, I go looking for answers.  That's when I read every news article over the past year and became intimately familiar with the company.

The news revealed several things:  (1) some profits were non-continuing - they were generated from sales of refineries to other companies;  (2) independent oil companies that explore, drill, refine, and send it to the gas station (horizontally integrated) were able to pass-off the refining portion of the business as a low margin loss leader, and since VLO was almost a pure play refiner, that was bad news;  (3) refiners lost a class action law suit regarding some additives added to the water supply whose long-term litigation liability is unknown;  (4) the combustible nature of the material is subject to numerous explosions at the refineries each year - it's amazing how much shit blows up (kinda reminds me of that old TV show "The A Team");  (5) capital intensive business - when crude goes up, refiners went down because of higher input costs, and when crude went down, refiners went down because of lower margins - that's how it felt over the past year.

The low-margin business business model, and the advantage that integrated oil companies had on refinery companies is what forced me to exit this subsector entirely.  This gave me enough information to know I need to exit my position entirely.

Two recent trades in the $31-32 range proved very profitable in short periods of time (1 and 35 days holding).  I felt like that was a floor.  I also knew in the $31-32 range, I was buying the company for below replacement cost.

I also knew Hurricane Ike was coming and it was gonna be big.  One week ago, I made this post about how Hurricane Ike was gonna be big, and it was gonna hit Florida:
http://www.atfreeforum.com/billyticketswin/viewtopic.php?mforum=billyticketswin&t=972&postdays=0&postorder=asc&start=0&mforum=billyticketswin

Well, Hurricane Ike missed the entire State of Florida.  It just proves how unreliable the meteologists still are today.

A couple days ago, Ike was heading toward Texas.  Again, the meteorologists predicted it hitting an area which only had BP and Exxon refineries...  I thought to myself...  Hey, this is my chance to fu'ck-over the integrated oil companies.

A week ago, VLO had another fire at a refinery and said they'd be down for 7-10 days.

On Wednesday this week, a couple days after the fire, VLO tanked -10%.  Mr. Market was depressed.

This was my chance to pounce Mr. Market.  I had a short-term Lallapalooza Effect on my hands:

(1)  Hurricane Ike aimed at 2 competitor refineries when I bought.  Now, Hurricane Ike aimed at 3 refineries (2 owned by VLO)
(2)  Hurricane Ike aimed at competive integrated oil assholes who sell refined product as loss leader
(3)  Mr. Market depressed - stock tanked -10% on that day
(4)  It was time to Average Down again
(5)  VLO trading below replacement cost
(6)  VLO still buying back stock
(7)  VLO making investments in refinery improvements
(8)  VLO had recent fire - Mr. Market depressed again
(9)  My news research did not indicate a serious mistake which would force me to exit - the goal was to maintain the course until profitable
(10)  Recent trading at the $31-32 floor range indicated high probability of trading wins

Now, the jury is still out on how high VLO is gonna go up, but I don't want to be piggish on this one because I was so wrong on the intial entry (ie. down -55% from out the gate).  vLO may still go up because of:  (1)  the sharp rise in gasoline prices today;  (2) serious upward momentum the past two days;  (3)  gasoline inventory levels at 8 year lows now.

In the end, I made a +8% real return and a +36% annualized return with VLO.

Here's all of my VLO trades:
http://www.vooch.com/images/vlo-20080912.pdf

- Vooch