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Cramer's Take: Fabulous but Fully Priced
Valero is too cheap to ignore. It will be able to buy endless amounts of stock back and it is extremely well run, I mean fabulously so. That said, I think that the big move has been made, the margins probably won't get higher and there are much better plays in the oil patch, including everything oil drilling related -- especially after the amazing, amazing run it has had and how low that the other stocks have fallen.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for ActionAlertsPLUS.
Long-Term Opportunity by Chris Edmonds
Valero should benefit from its ability to shift product shipments between its eight Gulf of Mexico locations, given the few limitations on the types of crude its refineries are capable of running. This could benefit the company in the wake of continued refinery outages and maintenance shutdowns. The efficiency gains at the Port Arthur refinery Valero acquired in the Premcor acquisition are more intriguing. Management says the efficiency gains from the facility are so significant it expects the processing capabilities to exceed those of Corpus Christi by the end of 2006. That is meaningful considering that Corpus Christi, the last grass-roots refinery built in the U.S., is considered to be one of the most sophisticated and efficient in the world.
On the macro side, tight refined product markets appear likely this year. The loss of MTBE (methyl tert-butyl ether) as a blend will reduce daily gasoline output by roughly 145,000 barrels of oil per day, just ahead of the summer driving season. As well, gasoline imports stand to provide little relief, as a large portion of imports come from Europe where MTBE is the primary blend stock.
In addition, the implementation of Tier II sulfur specs should keep less sophisticated refiners fighting for cleaner crude slates, keeping spreads wide, and the loss of sulfur credits next year presents a further challenge. In the end, sustained higher prices and wide spreads should mean more at the margin.
That said, I believe the stock is probably fairly valued, given the market where oil and gas are trading and inventory levels of gasoline and distillates. In the short-term there may not be much room to run, but refining capacity remains tight, so in the long-term, refiners like Valero will continue to produce strong profits.
Christopher S. Edmonds is a partner and managing director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.
Technician's Take: Crucial Test
In early January, Valero tested its 50-day moving average, which catapulted the stock to historic new heights above the September high of $58.62.
However, VLO recently stabbed back below that September high (this bearish move occurred approximately 180 degrees in time after the September high -- an important periodicity).
Currently VLO threatens to break its 50-day MA, which also coincides with the last buy pivot in January. If such a break occurs it would imply that the Jan. 31 high was a test-failure of the October high,indicating further selling pressure and consolidation.
Author of TheStreet.com's Trading Reports, Jeff Cooper is regarded by many as one of the leading authorities on short-term trading. Cooper is the creator of the Hit and Run Methodology and the author of the best-selling books Hit and Run Trading (The Short-Term Stock Traders' Bible), Hit and Run II (Capturing Explosive Short-Term Moves in Stocks), as well as a video course, Jeff Cooper on Dominating the Day Trading Market. He also created the Hit and Run Nightly Reports and cofounded a trading markets Internet site. While Mr. Cooper cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email
Options Opportunity by Steve Smith
The answer to whether fuel prices have peaked and if the sector remains a good investment is becoming more heated and will only be revealed over time. But the fact that the outlook is becoming more evenly divided, rather than predominantly bullish, will lead to increased volatility and good trading opportunities. Valero is a good proxy for the sector, and therefore a trading vehicle for tracking changes in perceptions and the actual fuel prices.
While I don't have a strong conviction to as the Valero's long-term prospects, I do have a slight bullish bias. To take advantage of short-term price swings, while maintaining a limited risk profile, traders could establish a position with a positive or long gamma. In plain English, gamma means the position becomes more bullish as prices rise and the position gets shorter or more bearish as prices decline. To be clear, this strategy is really only suitable for active traders.
One way to accomplish this would be to buy puts and buy stock on a ratio. To help mitigate time decay, I would look at buying puts with at least six months remaining until expiration. For example, with Valero currently trading around $55 a share, one could buy the September $60 puts for around $8.50 per contract. These have a minus 0.55 delta, meaning each contract is equivalent to being short approximately 55 shares. Therefore to create a position that is initially delta neutral, one could buy 55 shares for each put purchased. But since I go by the theory that neutral positions often result in neutral returns, and since I have a slightly bullish bias, I would consider buying stock at a slightly higher ratio. Then, in an effort to further reduce the cost of the puts and mitigate time decay, I might consider selling a lesser number of shorter-term puts at a lower strike, or further out-of-the-money, such as the March $50 puts which are trading around $1.
The position would look something like this:
Long 2,000 shares of Valero
Long 30 September $60 puts
Short 10 March $50 puts.
The position's initial delta is approximately 0.5 or about long 500 shares. If the stock should decline to $50 a share, the position's delta would be neutral. At $45 a share the delta becomes a negative 0.25, or equal to being short 250 shares. While the risk is limited, it can be substantial if the stock just drifts in a narrow to slightly lower range. Again, this strategy is predicated on the stock trending higher but with frequent pullbacks. The key to profitability is being able to flip the stock or make enough short-term trades to offset the cost of the puts.
Steven Smith writes regularly for TheStreet.com. To read more of Steve Smith's options ideas check out TheStreet.com Options Alerts. In keeping with TSC's editorial policy, Smith doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.