Top Picks 2007: Valero fuels refined gains for Ken Kam

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.