Savings Experiment: Snow Removal
The Money Man Behind Rick Santorum: Who Is Foster S. Friess?Last December, over 100 stocks were featured in our Top Picks for 2007 report. Now, at mid-year, we turn to the 20 advisors whose picks showed the strongest gains to get an update on their previous picks, as well as a new favorite stock for the second half of the year.
Ken Kam, editor of Marketscope, chose Valero Energy Corp. (NYSE: VLO) as his top pick for the year; it rose 48%, as of June 1, 2007. Here is his original recommendation for VLO as well as his new favorite stock idea for 2007.
Updating his outlook on Valero, Ken explains, "Refineries were once regarded by Wall Street as nothing more than future hazardous waste sites. For much of the last 30 years, it made sense to keep money-losing refineries operating in order to avoid the cleanup costs of shutting one down.
"Things have changed a lot in the past five years. Today, there is no excess refining capacity and profit margins have soared. The demand for refined products continues to grow along with the economy, but there are virtually no prospects for any new refineries being brought online anytime soon.
"The refineries that were once disregarded are now literally worth more than gold mines. Yet refining companies still trade at single-digit P/E ratios. Valero trades at a P/E less than 7. The S&P 500 by comparison has a P/E of about 16.
"There is no good reason why Valero's earnings are worth less than half the multiple of an S&P 500 company. After all, there are a lot of other industries that are less profitable and with more uncertain prospects than the refining industry that nevertheless trade at much higher P/E ratios.
"It's hard to predict when this will happen, but while we wait Valero can produce good gains for us even without a higher P/E by continuing to grow earnings.
"Meanwhile, refining profits have skyrocketed because there is a shortage of refining capacity. Unless new refining capacity is brought online, the shortage will get worse, causing refining margins to further strengthen, as long as the economy continues to grow.
"Barring a recession, refining profits look pretty solid -- which is a far cry from the industry's historical profit levels that Wall Street trots out to justify today's below average P/E. Valero remains one of the stocks in my Best Ideas Portfolio."
See all 20 stocks the advisors picked for the second half of 2007.
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