As an inefficient refiner, Caltex used to be one of the worst businesses on the ASX. The company devoured large swathes of capital and spat back paltry and unpredictable returns. It did this for years so, for years, we dismissed it.

Until about 18 months ago when we took another look. We found what appeared a lousy business in aggregate was in fact a combination of one terrific business and an awful one.

The ‘old Caltex’, dominated by refineries, was terrible. The company’s fuel retail business, however, boasted dominant market share, high barriers to entry and high incremental returns on capital. A high quality retail fuel business was obscured by a lousy refining business.

Better still, management were shutting refining assets to raise the retail business from obscurity. There were risks in shutting such complex assets but the share price then largely ignored the fact that, once this process was complete, Caltex would be a completely different  – far higher quality – business.

As Caltex announced its full year results this week, it’s clear that its transformation is complete. As a retailer, the ‘new Caltex’ has released $500m in working capital, consumes far less cash and generates high returns on capital. Following a near doubling of the share price, we recently recommended taking profits but not before taking a few lessons with us.

Firstly, forget the idea that the market is efficient. It isn’t. Otherwise changes underway at Caltex would have been priced in. Secondly, investing by numbers alone is a lazy approach. Those using data screens or blindly searching for high ROE, low PER results would have missed Caltex completely.

Caltex is a great example of an investing truth: to the better than the crowd, we must do something different from the crowd.

Extracted in full from Intelligent Investor.