Market turmoil hasn't dimmed Valero's (VLO) - Get Report healthy glow.

Shares of the San Antonio, Texas, company are down 19% from their late April peak, amid a broad selloff that has hammered strong and weak companies alike. But Wall Street remains firmly behind Valero, which has redefined the industry by focusing less on the absolute price of oil and more on "crack spreads" -- or the extra profit it can reap by processing the cheapest available crudes.

Deutsche Bank analyst Paul Sankey, otherwise something of a refiner bear, last month highlighted Valero as one of three top picks in the energy sector and the only refiner stock worth buying. More recently, on Tuesday, Gimme Credit bond analyst Philip Adams found himself pushing the company's bonds anew. He said he felt surprised that Valero's bond spreads had widened so much since his last report.

"The real reason why we think the market is wrong about Valero is that its financial performance should not fluctuate with the price of light, sweet crude oil futures," Adams stressed. "Valero's performance depends on crack spreads and the sour crude discount -- both of which are currently still expected to run considerably higher in 2006 than 2005, although off recent peaks. ...

The company's debt seems even a better buy today than it did two months ago."

Of course, Adams' outlook assumes that Valero will stick to its current plans. Specifically, the company will keep operating its strong refinery fleet and using less than $2 billion of its free cash flow to buy back about 5% of its outstanding shares.

But one analyst, forecasting possible changes under new leadership, feels that the company could do far more. On Wednesday, Valero rose $1.60 to $57.35.

'Valero Paradox'

In a detailed report issued on Wednesday, Petrie Parkman analyst Chi Chow spends roughly 20 pages trying to explain the so-called Valero paradox.

Chow starts with the obvious. Valero ranks as the nation's top refining company in terms of capacity, leverage to important trends and, "arguably, quality of management," he says. As a result, he notes, the company's stock rocketed 96% in 2004 and 127% in 2005. Moreover, he adds, the stock has held up relatively well -- posting a gain for the year so far -- despite the huge sector pullback last month. Even so, he concludes, Valero still features a lower price-to-earnings ratio than its peers.

"How can this be the case for a market-leading company?" he asks.

Chow then offers up some plausible reasons and, in turn, some possible remedies. For starters, he says, Valero spent more than any other refiner in recent years to grow and improve its asset base. He says that strategy, while "decidedly the correct one to increase profitability," has left the company with limited cash that it can return to investors.

Specifically, Chow continues, Valero has trailed its peers in share repurchases beyond those needed to cover options exercised by management.

However, with founding CEO Bill Greehey this year handing over the reins to Bill Klesse, Chow foresees a real potential for change ahead. Indeed, less than six months into that leadership switch, Chow sees hints of progress already.

'Massive Share Repurchases'

Chow points to Valero's capital spending program first.

Even as competitors ramp up their own spending -- in an era when "overruns on project costs are currently rampant" -- he notes, Valero has promised to stick with its established budget. Just this week, the company followed through by dropping any plans it had to buy two major refineries. Now, Chow believes that the company may actually choose to shed some of its own refineries instead.

He lists five possible underperformers that differ from the rest of the fleet. Notably, all process mostly sweet crude rather than the sour oils that lead to big crack spreads and outsized profits for the company.

Given the high value placed on refineries right now -- including the two that Valero walked away from -- Chow estimates that those five refineries could generate up to $5.8 billion in after-tax proceeds for the company. He believes the company could pocket an added $550 million by selling its U.S. retail gasoline operations as well.

"There is, in our opinion, only one course of action for the use of potential divestment proceeds -- massive share repurchases," Chow writes. "Total repurchases in 2006 and 2007 could conceivably reach $9.5 billion to $11 billion ... representing a potential reduction in shares of approximately 20% to 22%."

Chow views Klesse as a shareholder-friendly CEO who could jump-start that change. And he sees the company's stock rocketing by as much as 78% -- to nearly $100 a share -- if that happens.

To be clear, however, Chow seems to recognize the clear speculation behind his call.

"We do not suggest that Valero will actually sell the identified refining and retail assets in a timely matter (or potentially at all) given the radical change in business philosophy that such a strategy would represent," Chow concludes. "However, we do believe this is a plausible case and one that could help rectify the lagging valuation of VLO. Accordingly, our analysis is intended to show the potential upside to Valero's share price under an aggressive asset sale and share repurchase scenario."

Cautious Outlook

Harry Chernoff, a principal at Pathfinder Capital Advisors, offers a more conservative take.

Back in 2004, Chernoff regularly recommended Valero's stock -- at split-adjusted prices ranging from about $16 to $21 a share -- in stories published by

TheStreet.com

. But he no longer owns the stock.

"I like Valero as a core, long-term holding," he explains. "But I'm neutral to negative on equities in general."

Chernoff offers two major reasons for his cautious view. He sees rising interest rates cutting into liquidity and, in turn, cutting into the funds available for stocks. He believes a slowdown in mortgage-related loans will leave less money for investments as well.

Moreover, Chernoff has never been one to bank on major uncertainties -- such as the strategic direction of management -- when making his stock picks.

"I look more at operational and world events," Chernoff says. "I think Valero is going to get hit like other equities. ... I like it as an outperformer relatively -- I like it better than oil and gas stocks overall -- but I am cautious because of my macro outlook" for the economy in general.