This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stock Under $10 that he thinks could potentially double or triple in the next 6 to 12-months. See what he's trading today with a 14-day FREE pass.

Valero: Time to Declare Victory

Stocks in this article: VLO

By far, the hardest decision for an investor is when to sell a position, and often the greatest questions involve selling a winner.

Valero Energy (VLO) is a good case in point. We recommended the stock in our May 22 column on Real Money. The refiner was trading at $21.88 that day, valued at a compelling 5.9x 2012 estimated earnings and just 0.76x book value, with a solid 2.7% yield.

We expected that industry and company fundamentals would improve over the following year, thanks to cheap prices for natural gas (an input to the refining process), improving refining crack margins from lower crude prices due the shale oil revolution, and the completion of costly plant additions this year that will swing into massive free cash-flow generation next year as the new capacity comes online. On the basis of our valuation process, we posited a fair value for Valero in the low $30s, about 50% upside from the May 22 price.

Happily, our investment thesis has played out as hoped, by and large. Gas prices have stayed low. Refining crack spreads are still large, and more shale oil will be making its way to Valero's Gulf Coast refineries in the coming months and years. Some missteps by competitors have helped Valero: a Chevron (CVX) refinery fire in northern California, and major start-up problems for a Motiva refinery in the Gulf. In addition, management has decided to spin off its retail gas station business in the U.S. to shareholders, unlocking a further $1 to $3 a share within the next six months.

While many things played out as we envisioned, we were also pleasantly surprised that the stock moved up so sharply so quickly.

After reviewing all aspects of current industry conditions, we believe our target of low $30s still makes sense. (In our value discipline, the determined fair value for a company is our desired sale target price.)

Conditions look particularly good in the near term, and investor sentiment has moved to being very positive, and we believe that's what has driven the stock to these levels. Further, an analysis of the refining industry and its stocks' prices over the past five years shows a history of sudden and unanticipated about-faces -- in both directions -- for both industry trends and stock prices.

Given that, we would recommend taking half or more of your position off the table. Yes, many of the characteristics of the investment case are still unfolding, but the question is how much of that now-common knowledge is imputed into the stock price. Many of the same factors that drove Valero up 50% are still present, but now the stock is that much more fairly valued. While momentum and favorable near-term trends will probably take the stock higher in the near term, we believe the lion's share of the gains have been achieved, and we would be increasingly concerned about its risk (and vulnerability to a pullback) as it rises from current levels.

Matrix clients, our mutual fund, Katz and his family no longer own Valero. There are no other conflicts of interest.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV

Markets

DOW 17,900.32 +95.52 0.54%
S&P 500 2,071.46 +0.81 0.04%
NASDAQ 4,771.4890 +6.1090 0.13%

Our Tweets

Brokerage Partners

Top Rated Stocks Top Rated Funds Top Rated ETFs