Every investor who watched a favorite stock falter last year knows that nothing can be taken for granted in this economic environment.

Refusing to coast through a severe recession in lock-down mode, refiner Holly (NYSE:HOC) not only delivered a solid fourth quarter that crushed analyst expectations by more than 70%, but also utilized this period of weakened demand to increase its long-term competitive advantage.

Holly refined its way to marginally higher fourth-quarter income of $50.6 million, despite a 36% drop in revenue from the prior year. Fueling the performance was a 22% increase in the overall refinery gross margin to $12.01 per barrel produced. While larger competitors like Conoco Phillips (NYSE:COP) and Tesoro (NYSE:TSO) are idling entire refineries in response to thin margins and dwindling demand, Holly remains quite profitable at present prices and stands to benefit handsomely from any fuel-price strength that the majors are able to achieve with their production cuts. Valero Energy (NYSE:VLO) recently announced additional cuts after operating at less than 75% of capacity for the fourth quarter, whereas Holly is running above 90%.

Along with Valero Energy and pint-sized Calumet Specialty Products (NASDAQ:CLMT), Holly possesses the ability to process sour-crude feedstocks that provided a competitive advantage during oil's last climb. With expansions and improvements nearly completed at both refineries, Holly will not only face the next rise in oil prices with about an 18% increase in refining capacity, but also an enhanced ability to process sour crude. In fact, the Navajo refinery will soon be equipped to rely entirely on sour crudes if needed. Although I've been cool on the refining sector lately, as the majors have been cutting production, I am intrigued by the company's competitive refining spreads and the steps underway to enhance that sour-crude advantage.

Every rose has its thorn, however, and Holly is no exception. While collapsing oil prices ushered in cheaper feedstocks, they also threw the company's payable and receivable accounts into disarray and caused a $120 million cash draw-down. Also, since Holly Energy Partners (NYSE:HEP) was reconsolidated onto Holly's books, a $342 million blemish of debt has accrued. While Holly's balance sheet remains substantially less frightening than that of competitor Western Refining (NYSE:WNR), these developments must be watched closely in this environment, which is why I've added Holly to my CAPS watchlist rather than picking the stock outright.

Further Foolishness:

513 Motley Fool CAPS members expect four-star pick Holly to outperform the S&P 500. Join the free community of talented investors today, and share your thoughts on this beleaguered stock.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Valero. The Motley Fool has a highly refined disclosure policy.