Readers of this space know that one of the preferred sectors has been the refining sector, with exclusions made for a few companies. Would that the United States (and much of the world, for that matter), transition to a next-generation propulsion system (natural gas, electric, fuel cell) quickly, but unfortunately that goal still looks a decade away, perhaps more. And that means refiners like Valero Energy (NYSE: VLO) will remain a force.The market punished Valero in 2008 after refining margins narrowed substantially, but folks, we're talking gasoline in the United States here: gasoline refining margins can't (and didn't) contract for very long, and significant, additional margin improvement in seen in 2009.
The initial margin contraction was caused by record-high oil prices amid a U.S. consumer that had started to (understandably) decrease gasoline consumption. The collapse in oil's price has since helped margins, and although gasoline use is still tepid, the spread is big enough and that fact, combined with VLO's ability to refine lower quality crude grades, are two good reasons to consider VLO. Valero's also the largest refiner in North America, so as long you'll be driving, VLO will be racking up earnings gains. The First Call F2009 / F2010 EPS estimates for VLO are $2.68 / $3.44.
Stock Analysis: Valero Energy is a moderate-risk stock. Consider buying a 25% position in VLO now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your VLO position in the first half of 2009. Sell / Stop Loss if you were to buy shares in this company: $11.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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