A few days ago I posted Chasing Value: Valero -- when is a downgrade an upgrade? and since then I have become even more disturbed with our government and the stock analysts, as well as the companies they represent. Eitan Bernstein, an analyst with Friedman, Billings, Ramsey & Co downgraded his expectations for the major oil refiners Wednesday and lowered his price target for Valero Energy (NYSE: VLO) from $77 to $65.
How can this be? The stock was trading around $40 per share and closed Friday at $39.96. As a shareholder who has watched this stock go down, any signs of optimism have to be welcome I suppose, but what in the world is this guy saying. He is saying he has concerns about the sector, but believes VLO will be 61.5% higher this time next year any way!
This makes no sense. He can't be too concerned, can he? If you believed him you would buy all the VLO shares you could get hold of -- and so would he! Maybe he did? Or maybe he is trying to pump up the stock to help a big client? Or maybe he is clueless and does not know what he is talking about? What might his e-mails reveal?
Anyone can predict anything, and they have a right to be an idiot, but what responsibility does he have to eat his own cooking? VLO started the year near a high that is between Bernstein's old and new projections, and I for one have hopes of it rebounding, but I do not have the level of certainty to broadcast such an exact figure. What is the purpose?
The change in his projections of 15.5% is indicative of the silliness of this analysis. We have seen this before and will see it again ... so buyer beware.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.DISCLOSURE: I currently own shares of VLO.
After five months of tracking my 2008 picks, it is rewarding to finally have a breakthrough -- topping the three major stock indices and Berkshire Hathaway (NYSE: BRK.B) too. It has been painful to have to report each month that I was being bested. However, since I have not seen anything contradicting my original rationale for my eight picks I stood my ground.
Moving into positive territory by pennies was Loews Corporation (NYSE: LTR). Among its holdings is a 51% stake in Diamond Offshore Drilling, Inc. (NYSE: DO) that has been doing well as the world remains desperate for more oil and natural gas.
Bunge Limited (NYSE: BG) was the other stock to cross the line into the black, while Valero Energy Corp. (NYSE: VLO), although improving, remains my worst performer. It is still down almost 28% after five months.
Reuters reports that ExxonMobil (NYSE: XOM) CEO Rex Tillerson went on The Today Show this morning to discuss the price of gasoline. Why? I think it's because he wants to diffuse political pressure to raise taxes on oil companies. Tillerson said that the price of gas is so high that people are using less of it.
But the subtext, in my opinion, was to put a face on the industry in the mind of the public so that it would be harder for politicians to harness public anger into higher taxes. Some big oil companies now have "too much" money coming in, with oil prices as high as they are. One of them has recently been in low-level debates with investors over what to do with all their cash as in "they can't spend it fast enough," an irony when gas prices are so high.
But as I posted yesterday, not all oil companies think that they have too much money coming in. Many such as Exxon and Valero Energy (NYSE: VLO) have reported disappointing earnings in the first quarter because the price of a barrel of oil has doubled while the wholesale price of gasoline has risen only 39%.
Valero Energy (NYSE: VLO) shares are trading higher along with most other refiners, as crude oil futures have dropped off from last week's record highs, which could start to help out refiner's margins. Also moving VLO is news that a large California refinery is coming back on line with no significant loss of production after a power outage yesterday morning. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on VLO.
After hitting a one-year high of $78.68 in July, the stock hit a one-year low of $44.55 last week. VLO opened this morning at $45.06. So far today the stock has hit a low of $45.01 and a high of $46.93. As of 12:45, VLO is trading at $46.86, up $2.30 (5.2%). The chart for VLO looks neutral and improving, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.
For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $40 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just six weeks as long as VLO is above $40 at June expiration. Valero would have to fall by more than 14% before we would start to lose money.
VLO hasn't been below $40 at all in the past year and has shown support around $45 recently. This trade could be risky if the price of gasoline falls off if demand starts to lower, but even though there is a slowdown in the US, other global economies are still clamoring for energy, which could keep prices high.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in VLO.
The Wall Street Journal reports that Valero Energy (NYSE: VLO), the U.S.'s largest oil refiner, experienced a 77% plunge in earnings in the first quarter. The market is happy with the result. How so? Analysts expected Valero to make 29 cents a share and Valero exceeded that by 66% -- earning 48 cents a share. The stock is up 1.2% in early trading.
Poor Valero. The costs it pays for the crude it refines are growing faster than the prices it can charge consumers due to what it says is weak demand. Firms like Valero that don't have crude oil-producing operations are expected to fare poorly due to their inability to raise gasoline prices even more. Valero, also one of the largest U.S. gas retailers, cited weak margins, with its Gulf Coast gasoline margin down 59% from a year earlier. Margins also fell on secondary products such as asphalt and fuel oil.
How will Valero relieve its suffering? It's planning to reduce the output of its West Coast refineries so it can raise gasoline prices more. Valero has said it is considering an overhaul of its refineries that could result in the sale of one or more facilities. Valero hopes any move would make it a more efficient refiner in a time of high and volatile oil prices and rising global competition.
Got that? Valero is suffering because gasoline prices are not high enough. Are you happy now?
MOST NOTEWORTHY: Cott Corp, Hartford Financial, Allstate and Valero Energy were today's noteworthy upgrades:
Lehman upgraded Cott Corp (NYSE: COT) to Equal Weight from Underweight citing recent management changes, a focus on CSD business, and new product discipline.
Bernstein believes the entire non-life insurance group is oversold and that it is time to buy; the firm upgraded Hartford Financial (NYSE: HIG) and Allstate (NYSE: ALL) to Outperform from Market Perform.
Valero Energy (NYSE: VLO) was raised to Buy from Hold at Deutsche Bank on valuation with the stock trading at a -30% discount to NAV while the asset market for U.S. refineries is strong.
OTHER UPGRADES:
Goldman added Cisco (NASDAQ: CSCO) to its Conviction Buy List.
Valero Energy (NYSE: VLO) is recently trading at $48 in pre-open trading, below its close of $50.08.
VLO guided Q1 earnings lower because of unplanned outages within its refining system.
Goldman says: "While the 1Q shortfall is unfortunate, it does not change our bullish outlook for the shares and we reiterate our Conviction Buy rating."
Crude oil futures are recently down 0.38% to $100.48 according to Bloomberg.
VLO April option implied volatility of 48 is above its 26-week average of 39 according to Track Data, suggesting larger price risks.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Valero Energy Corp. (NYSE: VLO) stock is trading lower today despite rising oil futures after the US House of Representatives passed an energy bill that will pay for $17 billion dollars of tax credits for wind and solar energy production by ending tax incentives for oil and natural gas producers. Though the bill still must pass the Senate and be approved by the President, this could be a bad sign for the oil industry, long a beneficiary of Congressional subsidies. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on VLO.
After hitting a one-year high of $78.68 in July, the stock hit a one-year low of $47.80 in January. This morning, VLO opened at $60.93. So far today the stock has hit a low of $57.92 and a high of $60.93. As of 11:00, VLO is trading at $58.01, down $2.80 (-4.6%). The chart for VLO looks neutral and improving slightly, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
January was a wild ride and February holds the promise of more of the same after yesterday's 370 point drop in the Dow. All the major indices were down in January and so were seven of my eight picks. Only Raytheon Co. (NYSE: RTN), the high tech defense contractor, was up. My two high flyers from last year, Huaneng Power International, Inc. (ADR) (NYSE: HNP) and Valero Energy Corp. (NYSE: VLO), were the biggest losers.
Among the indices, the DJIA lost the least and the NASDAQ lost the most. The average return for my eight picks was -7.82%. This underperformed the average of the indices that was -7.58% -- but my new stalking horse Berkshire Hathaway (NYSE: BRK.B) bested both, so Buffett is still the man.
Now including dividends for my picks which average 3.91% divided by 12 for the one month allows for an additional .326%, reducing the loss to -7.494%. Using 1.8% for the average dividend of the indices divided by 12 adds 0.15%, reducing the loss to -7.43%. The dividends tighted things up. BRK.B does not pay a dividend.
The following are my eight picks with the starting share price as of December 28, 2007:
A few days behind schedule, but here is my list of eight stocks. Included in the list there are two holdovers from the 2007 list of seven stocks. I do not see any value in creating an entirely new list when I have done well over the years riding the winners. This is particularly true if the reasons you bought the stock in the first place remain valid.
These eight picks for the year will be tracked monthly with updated results. The initial share prices are from December 28, 2007. They are focused on defense, energy, food, gold, metals, mining, oil, power, and every one pays a dividends. The following are my "Quick Takes" in alphabetical order with links to the complete stories.
Anglo American plc (ADR) (NASDAQ: AAUK) is a world-class player in precious metals, diamonds, and commodities, which are all growing in demand. When the world economy is booming, all of its mining products are sought after, and when the market runs scared, gold goes up. It pays a dividend yield of 1.9% and is trading almost 25% off its 52-week high. For full story: Chasing Value: Anglo American diamonds and gold are your best friend. The closing price on December 28, 2007, for AAUK was $30.79.
After hitting a one-year low of $47.66 in January, the stock hit a one-year high of $78.68 in July. VLO opened this morning at $70.17. So far today the stock has hit a low of $69.89 and a high of $71.12. As of 10:50, VLO is trading at $69.93, down $0.10 (0.1%). The chart for VLO looks neutral and improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a February bull-put credit spread below the $62.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in just 2 months as long as VLO is above $62.50 at February expiration. Valero would have to fall by more than 10% before we would start to lose money.
Investors and readers know about the barely-adequate crude oil refining system in the United States.
It's hard to believe, but when the U.S. opens its next refinery, it will be the first new one in more than 20 years. Meanwhile, demand for refined crude products, including gasoline, continues to rise. That's why it makes sense to consider a refining stock or two, such as Valero Energy (NYSE: VLO).
Valero is the largest oil refiner in the United States, but that's not the only compelling dimension to VLO. Valero also boasts what oil analysts call "refining flex." Valero can process large amounts of lower-cost heavy and sour crude -- refining these into cleaner-burning, higher-margin products, including low-sulfur diesel.
Another VLO advantage: Valero has refineries throughout the U.S., in New Jersey, Delaware, Louisiana, Oklahoma, Tennessee, Texas and California, in addition to facilities in Aruba and Canada. The company's overall production capacity is 3.1 million barrels per day. The Reuters F2007/F2008 EPS consensus estimates for VLO are $8.19/$8.16.
The risks? A major U.S. economic slowdown or recession would hurt VLO's results. Further, margins on selected product grades may narrow in 2008, but many grades will still be above historical norms.
The First Call mean rating for VLO is: Buy. [21 firms.] Mean 2008 target: $80.40. [high: $110, low: $51.]
Stock Analysis: Valero is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than one year should be rewarded from VLO's shares. Sell / Stop Loss if you were to purchase shares in this company: $44.
The holiday season may have just begun, but the earnings season continues. Here are some highlights of this past week's earnings coverage from BloggingStocks:
After five months of tracking my 2008 picks, it is rewarding to finally have a breakthrough -- topping the three major stock indices and 
Here are some highlights from this past week's .gif){kind=logo}
Valero Energy
Dow. All the major indices were down in January and so were seven of my eight picks. Only 
Anheuser-Busch (BUD) sues InBev, what's next?
Wal-Mart might help your portfolio during the recession
IndyMac (IMB) turns to stone
