Deep In The Money Calls With Jon Najarian
A Different Rite of Spring
Spring has sprung. It's time to cut the grass again, get out the baseball gloves and start thinking about school vacation in July and August.It's also time for another well-established rite of spring: Oil refinery ramp-up. Around this time every year, refineries begin to make more gasoline in preparation for the summer driving season. The industry has been in a significant contraction recently, cutting production and trimming costs to survive the recession -- which positions it well for an economic rebound. We've already seen optimism sweep early-stage sectors such as chemicals and packaging, and think the refiners might not be far behind. As such, the best way to play it is with today's stock pick, Valero Energy (VLO:NYSE).
Last week's Department of Energy report offered cause for hope as gasoline inventories unexpectedly dropped by 4.7 million barrels despite an accumulation of crude oil. Valero, the biggest U.S. refiner, last week spoke of "better-than-expected gasoline fundamentals" because cheaper oil and natural gas expanded profit margins.
The groundwork is in place for a rebound. Refineries ran at just 82.7% of their capacity in the final week of April, the lowest reading for this time of year since at least the early 1990s, according to the Department of Energy. If the economic "green shoots" are real, gasoline demand will increase and refineries like Valero will print money as they bring capacity back on line.
Even if the optimists are wrong about the economy, Valero is positioning itself for the future by paying down debt and acquiring ethanol plants on the cheap from the bankrupt VeraSun. Valero also has the ability to cut more than $500 million from its capital expenditures if demand really falls off a cliff.
The company reported better-than-expected first-quarter results last week, and we'll hear from rivals such as Sunoco (SUN:NYSE), Tesoro (TSO:NYSE) and Holly (HOC:NYSE) this week. If these names offer similarly positive news, investor sentiment could turn positive and lift the entire sector. (Sunoco faced bullish call buying last week, ahead of its report.)
We suggest buying Valero's September $12.50 (VLBIB) calls because they are the simplest way to profit from a move and are dirt cheap, charging investors a mere 20 cents for the right to leverage returns in the name over the next four months. We advise waiting for the calls to pull back to $7.75 from their $8.35 asking price Friday. Shares of Valero should return to $24 soon and may see $30 by Labor Day if the right pieces fall into place. That would add $3 to $9 to the price of the calls, which would translate into gains of about 40% to more than 100%.
Regards,
Jon Najarian
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DISCLOSURE: At the time of publication, Jon Najarian did not hold a position in VLO.
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12/11/09 - 10:03 AM ESTPete Najarian is the author of TheStreet.com Deep In The Money Calls (the "Product"). Mr. Najarian a professional investor, noted media analyst and speaker, and co-founder of optionMONSTER®.
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| Dow Jones | S&P 500 | NASDAQ | 10-Year Note | |
|---|---|---|---|---|
| 10,449.74 | 1,116.35 | 2,238.00 | 36.30 |
Oil *
74.24
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UP
120.85
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UP
13.88
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UP
26.31
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UP
0.84
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10 Yr
3.63%
SPDR Gold
108.21
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+1.17%
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+1.26%
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+1.19%
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+2.37%
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