I continue to get a lot of questions on CVR Refining LP (CVRR), a recommendation I made on its initial public offering and a stock I only marginally hold now. Let's look at CVRR again, because I believe it is a worthy case study in trading.
At the IPO last January, CVRR had everything going for it: a major stakeholder by the name of Carl Icahn (still holding) and a pair of midcontinent refineries that were sure to take great advantage of the increasing oil glut and, therefore, discounted domestic prices being delivered by pipeline from the Bakken and Eagle Ford shales. While the IPO wasn't underpriced, it still managed to soar in the first few months after its debut, moving to nearly $36 from an initial price of $24. For my part, I took a first distribution of $1.58 per share and trimmed my holding in May.
A secondary piqued my interest in the stock again, particularly as superstar Icahn used the opportunity to increase his holdings. Was I lured back by the name recognition more than the stock's fundamentals? Perhaps, but with some buys throughout the later summer, I reinitiated my position at a good, if not great, basis and felt good about the position when the second-quarter distribution yielded a nifty $1.35.
Since the summer, however, things have not gone well for CVRR, particularly after a long and unplanned shutdown of its Coffeyville refinery that demolished third-quarter performance. When a $0.30 per share distribution was announced in November, it was a shock.
But this is where the story becomes interesting, and gives us the trading lesson we're looking for. Even with the disastrous third quarter, CVRR still delivered a reasonable 5%-plus return, and there was no reason to believe that its distributions would not return above $1 or more in 2014. Adding to my confidence in the stock and its temporary slide below $24 was an expanding Brent/WTI crude spread, signaling great refinery margins for CVRR and other midcontinent refiners -- a trend I predicted would continue through much of 2014. Plus, Icahn hasn't sold a share, as far as I can tell from his holdings disclosures. CVRR was a screaming buy, or at least worthy of a very strong hold.
Yet, the stock continued to trade poorly. Let me rephrase that: It doesn't just trade poorly; it trades miserably.
So, what is this price action trying to tell me that I don't know?
Remember, I am a career floor trader, not an analyst, and my mantra has always been that the market tells me all I need to know. When presented with a conflict between numbers and market action, I tend to listen to the tape. That's why when my accountant called looking for me to generate tax losses for 2013, I took the opportunity to re-trim my position in CVRR way back. I still want to own this stock, and I still believe in the fundamental picture that it paints, but I'm just looking for better price action that mirrors the supposedly positive picture I'm seeing.
And CVRR gives us a lesson to learn: Do you listen to the numbers, or do you listen to the market? Either method can work for traders, provided they're sensitive and disciplined enough to adhere to it. For me, the tape has always been my ultimate arbiter -- but it doesn't have to be yours.