The world is awash in oil. For now. Gasoline prices are at moderate levels. For now. And analysts say slack demand will keep a lid on gasoline prices this summer. Well, as the singer Meatloaf would say, two out of three ain't bad.
Given the continuing U.S. recession (which has taken many drivers off the road), all signs point to moderate gasoline prices for the duration of the summer, unless the unexpected occurs, such as a refinery outage or a damaging hurricane season. At that point gasoline prices could spike and begin to trend higher -- as they so often do in the summer -- exasperating many, unless you've purchased shares in Sunoco (NYSE: SUN).
As oil prices collapsed at the end of the leveraging bubble, Wall Street reacted predictably with Sunoco's shares, driving them down to about $21 from expansion-era highs above $80. Institutional investors particularly didn't like the fact that Sunoco has limited capacity to refine sour crude, which had larger margins than other refined grades. As a result, Sunoco's shares are now about as cheap as an empty shoe box. And as the legendary founder and owner of the New York Giants, the late Tim Mara, once said, 'Even an empty shoe box is worth $500.'
The upside in the above? It's allowed SUN to refine a relatively high volume of higher-grade products. And that fact, combined with other refining businesses, and the likely stabilization in U.S. gasoline demand later in 2009, will send institution investors back into SUN, which is why a position here is favored. The First Call F2009/F2010 EPS estimates for SUN are $3.16/$4.03.
Stock Analysis: Sunoco is a moderate-risk stock. Consider buying a 25% position in SUN 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 SUN position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $17.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.