BOSTON ( TheStreet) -- Commodities cratered last week, with silver posting its biggest decline since 1975 and oil recording its largest drop in three years, sending a chill through the markets as the hottest, and best-performing, investments turned cold overnight.Increases in Comex margin requirements decimated bets on silver, which plunged 27% in a week, and gold slid for three days, the worst decrease in a year. Individual investors, who have been playing the commodities markets through exchange traded funds, have been burned. The heavily traded ProShares Ultra Silver ( AGQ) fund has dropped by 48% in just five trading sessions, illustrating Newton's law of investing: What comes up, must come down. Still, the sell-off has positive implications for the economy.
Tesoro receives an uninspiring 44% proportion of "buy" ratings and Valero garners 50%. Tesoro beat analysts' adjusted first-quarter earnings estimate by an impressive 16%, but its stock fell 2.5% in reaction. Valero, on the other hand, missed by 38%, but its shares dropped just 3.7% following the release. Morningstar, which awards Valero three stars out of five and Tesoro two stars, is wary of the companies. Both realized gross margins widened during the quarter as their refining throughput margins nearly doubled, on a per barrel basis. Also, both benefitted from strategic cost cuts commenced during the recession, when losses piled up. Morningstar is cautious on these independent refiners as they are subject to demand destruction at currently high gasoline prices, and a still-below-trend recovery may signal that demand growth will taper, especially in light of a recent uptick in the unemployment rate. Furthermore, the rising political will of environmentalists may threaten the companies in coming years, especially considering the modest taxes imposed on U.S. gas sales. Add sizable debt loads and you have yet another reason to be cautious about refiner stocks. Morningstar values Tesoro at $18, suggesting 28% downside, and Valero at $26, implying a more modest correction of 3%. Describing both firms as having "no economic moat" and "high uncertainty" pertaining to the businesses' long-run viability, Morningstar is advising individual investors to find safer pastures. Given the recent run in these stocks and the potential for a pick-up in the commodity downdraft, profit taking may still be the best, and safest, option for individual stockholders.
-- Written by Jake Lynch in Boston.
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