"Valero Energy is misunderstood on Wall Street," says Ken Kam, the editor of Marketscope. Here, he explains why he considers Valero Energy (NYSE: VLO) one of his "Best Ideas."
The advisor says, "When oil prices go down and Wall Street wants to sell energy stocks, Valero invariably gets sold off as well, just because it's part of the energy index. But Valero does not produce oil; it refines crude.
"So its profits do not necessarily rise and fall with the price of oil. Valero's earnings have skyrocketed in the past five years not because of rising oil prices but because there is a shortage of refining capacity. That shortage gets worse as the economy grows and our government refuses to allow more refineries to be built.
"I think the chances that the government will allow a refinery to be built in this country within my two-year investment horizon are pretty close to zero. This means that unless there is a recession, the shortage of refining capacity will get worse and Valero's profits will get better, whether oil prices go up or down.
"Valero's P/E is less than half that of the S&P 500. Yet I would say that Valero's prospects for future growth and profitability are better than that of the average S&P 500 company. That is one reason I think Valero could trade much higher.
"In addition to being a great investment on its own merits, Valero gives me some protection against one of the real risks I see for investors -- a spike in oil prices. And there are a number of easy-to-imagine scenarios in which the price of oil could spike very quickly. Overall, I think VLO has the potential to double over the next two years."
Each day, Steven Halpern's TheStockAdvisors.com features the latest investment commentary and favorite stocks of the nation's leading financial newsletter advisors.
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Reader Comments (Page 1 of 1)
10-22-2007 @ 11:07PM
Bob said...
I basically agree with your sentiments and am very disappointed with Valero's performance for the past six months. Even though I am losing with it, I will hold this stock just because I like the company. Valero will suffer as long as crude is high and retail is low. In addition many oil derivatives including asphalt are flat it price which works against Valero. With time, I feel this well managed and strategic corporation will outperform the market.
Thanks,
Bob
10-23-2007 @ 1:44PM
Steve Crossland said...
I have held Valero for the past five years and have enjoyed great growth with solid fundamentals.
For the past year Valero has traded within a range of 62-75 after its last split. Right now I trade half my position when the stock hits the low 70's and buy back when the stack falls into the mid 60's This approach has been very successful.
10-24-2007 @ 10:53PM
mizzou2020 said...
An alternative to trading half you position in a stock you like for the intermediate to longer term is to sell covered calls at the next highest strike. I will usually go out no more than the second month. On some stocks like DRYS, you can pick up 6-10% in a month...plus 5-7% up side in the stock if it called.
11-07-2007 @ 7:17PM
rmistler said...
I feel that Valero is also well positioned due to the location of its refinerys being in less volitile regions of the world. I can see disruptions in the middle east as well as the current trend of Canada to extract more of the profits for its own citizens. While the growth of demand in this country continues to grow and the volitility in the rest of the world growing as well, I can only see these situations as a growing positive for this companies revenue growth.