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Although he has been maintaining a cautious stance on the refining group, energy sector expert Elliott Gue is now boosting the rating on Valero Energy (NYSE: VLO).

In his The Energy Strategist, the advisor explains, "Valero is now attractive for three reasons: superior geographic exposure, refinery complexity and a new focus on profitability."

"Our caution on the refining group was due to expectations that crack spreads would be weak through the spring, a period during which spreads tend to widen. Overall, this call was correct: Refiners have underperformed the energy patch since mid-March.

"And longer term, I have some concerns about new refining capacity expansions due to come online over the next few years. As this supply comes online, it could put downside pressure on margins.

"But over the next six to nine months, the refiners look like a compelling play. Gasoline inventories are now back in line with seasonal norms; it's likely gasoline prices will now rally further relative to crude oil. In fact, we're already seeing an obvious spike in crack spreads.

"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.

"I am very pleased with the performance of our energy investments and I particularly like the refiners," says resource expert Curtis Hesler. The editor of The Professional Timing Service has also owned Valero Energy (NYSE: VLO) and Frontier Oil (NYSE: FTO) since 2005, and despite their strong performance, he says, "You should try and work these into your holdings during weakness."

Hesler explains, "Refiners have the ability to refine sour crude, which is becoming more prevalent on the market as the sweet crude fields peak out. In this process, sour high sulphur crude will make up more and more of available supply to the distinct advantage of those few refiners that can process it.

And yes, he adds, crude oil production is "already peaking out." He says, "I think you will find that once the numbers are gathered, 2006 will become the official year that global crude oil production peaked out."

He notes, "Another aspect of sour crude is that it sells for a significant discount to sweet crude, and the difference goes straight into the refiner's profit column. You will pay the same price for gasoline no matter what type of crude it is made from.

Frontier, he observes, has the advantage of being located outside the hurricane regions, and it's not susceptible to storm damage like Valero. However, he says, Valero has the ability to efficiently make 'boutique' gasoline blends. And he adds, "It is estimated that for every penny that gasoline prices move up, Valero makes an extra $1 million profit!"

For more stock picks from the leading financial newsletter advisors, visit Steven Halpern's free daily website, TheStockAdvisors.com.

Each year Steven Halpern, editor of TheStockAdvisors.com, surveys the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is part of his 24th annual Top Picks Report.

Valero Energy (NYSE: VLO) is the favorite conservative investment for 2007 from Ken Kam, editor of Marketocracy's Marketscope. He notes, "In spite of nearly doubling its earnings in the past year, Valero currently trades at a P/E of 6.

"I find comfort in the combination of solid earnings, earnings growth, and low P/E ratio. With the economy slowing, many companies are going to find it harder to keep their earnings growing next year.

"I think many people misunderstand Valero's economics because the stock seems to sell off whenever the price of oil drops. But when oil prices go down, Valero's biggest cost of production goes down and demand for refined products increases. How is this bad for Valero?

"Wall Street accords the stock a P/E of 6 because analysts think refining industry profits are going to fall. To back up their view, they point to the fact that there has been a bust after every previous oil boom.

"They may be right, but I think Valero's profit margins will remain high as long as there are no new oil refineries built in this country. The minute we hear that the government has issued all the permits needed to build a new refinery, we'll have roughly two years before it comes online and begins to affect refining industry profit margins.

"We'll be monitoring the situation, but the last time a new refinery was brought online in the U.S. was in 1976, so don't hold your breath waiting for news on this front."

To see Ken's favorite speculation for 2007, click here.