Picking stocks is a tough business. 

Those that pursue the task of building portfolios (like me) will always find that in some cases, they are just flat out wrong.  I liken it to baseball player’s ERA. The best hitters fail 7 out of 10 times.  Fortunately, my batting average is significantly better. In fact, I tend to reverse that average by being right 7 out of 10 times.  (Okay, I realize this also means I’m wrong 3 out of every 10 picks.) 

One disaster for me has been my selection of Tesoro Petroleum (TSO). In fact, I made this oil refiner one of my top 10 stock selections for 2008. Earlier this year, I mistakenly thought oil prices would stabilize.

And boy was I wrong!

See, oil refiners don’t make money when crude prices fluctuate. If oil prices just stayed put, refiners would be poised to have a record year.  Well, that theory got shot down pretty quickly when 2008 turned out to be a record year in oil price volatility.  In fact, oil prices are in the grips of a speculative frenzy. And as a result, oil refiners like TSO have plummeted in value. 

Time to Practice What I Preach

My recommendation of TSO started the year at a price of $47 and change.  Today, shares trade for a paltry $18.  That’s more than 60% drop in share price.  At this point, I don’t think it is possible to be more wrong. I’m sorry. I simply should have known better. 

I originally discovered TSO when it was near bankruptcy in 2002.  Shares traded below $5 per share at the time, but bounced back to become one of my biggest winners.  Having lost 50% of its value in 2007, I just couldn’t resist recommended a name that had been such a star for me. 

I didn’t follow my own golden rule: Never fall in love with your stocks. 

As I look at TSO today, I have to admit that the stock price is very tempting. But I’m not biting (again).  I don’t like owning oil stocks now that prices are in the process of correcting from a speculative bubble. That being said, I do think oil refiners represent fantastic value, here’s why.

Typically, volatility ends when prices bounce along a bottom and oil refiners can be expected to better manage purchases and sales in the stabilized market.  Doing so will help margins and result in greater profits. Shares of TSO fell to around $14 earlier this summer and have already begun an ascent that I expect to continue over the next year or so. If oil prices fall to $80 per barrel (as I think they will) TSO is perfectly poised to benefit.

The key here is that the market is not expecting outcome.  Thus, Rational Investors can take advantage by building a position in TSO at the current price.  In fact, it’s not hard for me to see TSO doubling from the drop in oil prices.  But to do so, oil volatility has to stabilize. I promise you this: Once it does, oil refineries will be hitting them out of the park.