Innospec Dropped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Sometimes, events cause a company's name to take on a meaning that's probably ... well, that's probably a bit different from what the corporate founders had intended to imply. That's the case with Innospec (Nasdaq: IOSP  ) today, whose shares are looking increasingly speculative as they crater 10% on no news at all.

So what: Today's sell-off looks like a photo negative of the unexplained run-up in share price that we saw back in March. Back then, fellow Fool Brian Pacampara suggested it was a rise in oil prices that had investors piling into Innospec as a "fuel efficiency play." Logically, CME Group's (NYSE: CME  ) decision to tighten margin requirements on the NYMEX could be causing a "pin-action" drop at Innospec, responding to fears this will cause oil prices to drop.

Now what: Maybe that's the right call, maybe not. Here's what I do know: A few months back, I took a cue from Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) purchase of Lubrizol (NYSE: LZ  ) , and tapped Innospec as a cheap way for small investors to ride Buffett's coattails. So far that's been good advice, as Innospec shares rallied strongly in response to the deal.

Today, though, I look at Innospec and see a company that while arguably undervalued on a P/E basis, isn't generating the kind of free cash flow I'd need to see before buying it. Whether you join in the Innospec sell-off, or decide to ride it out, my advice is simply this: For heaven's sake, don't buy more. Not until the company gets its cash-generating machine back in working order.

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