Valero Energy Corp (VLO)

(A Top Pick Jan 8/16. Down 8.79%.) Had a huge downturn in Jan/Feb due to the pickup in gasoline production. The period of seasonal strength ends at the beginning of April.

(His Top Pick stocks are still holding up as of present, but the big warning is the systemic risk that is involved with the market.) There are very few stocks that are good in the energy sector. Where the supply of oil presently is, gives you about 29 days of supply, so there is a substantial supply. All this company is going to do is refine it, which is going to be a significant tailwind for them. He has a long-term trend line support starting at about $60. As long as that can be maintained, there is an average gain between the start of the year and the beginning of May of about 20.1%, and that has been positive in 21 of the past 25 periods.

He finds it too volatile for his clients. As oil prices have continued to decline and spreads for gasoline and diesel have continued to stay high, the profitability of a company like this has done really well.

Wouldn’t own this one here. It is a cyclical. His model price is $112, 84% over the last close of $60.83. You always get this in a cyclical. He would like to see it back at $15 again, and then he would be interested.

Crack spread is the spread between the crude and the underlying refined product price. VLO-N is an example of a pure refiner. A few weeks ago crack spreads reduced and the price went right down. Warren Buffet bought a refiner today, relatively close to the top.

Owned personally in the past, but it is too volatile for his clients. It has done well over the year and seasonally the demand is highest here. They don’t find or produce oil. They buy it and refine it and they own gas stations. It is a good company to own long term. Over two years the refiners could be the right place to be, but they will be more volatile.

Energy has a period of seasonal strength from January all the way through to May 9 on average, and this one has performed up to expectations. It is currently consolidating. We have the end of seasonal strength coming. If you are looking past the seasonality, you want to be into the refiners right now. From a seasonal play, he would recommend getting in right now, but from a longer-term perspective this is a place you want to be in the energy sector.

He is warm to it and owns it personally. Does not own it in client accounts because it is too volatile. Has the refining capacity to take heavy oil and refine it well. Thinks the price of oil will drop.

On and off he has liked the pure refining stocks, but for his own personal portfolio as it is a little risky for his clients. Even though they have tons of gas stations, what really moves this stock are the refining and marketing margins, which they make on each gallon of gas they sell. Refining margins depend on where West Texas prices are, where Brent North Sea prices are, and the spread between the 2. Also, if they are able to buy cheap Canadian oil this makes a big difference for them. When times are good that means they are getting the bigger spread.

The bad news is that the stock had moved back up to technical resistance in the $58-$59 area, before setting back down to another support level. Technically it has been walking upstairs steadily. The good news is that his Fair Market Value is well up over $100. He could see this getting as high as $80 on its current fundamentals.

Refiners are the ultimate cyclicals because you have no control over input costs and very little control over the end demand. There is still excess refining capacity, particularly in Europe. If you own, take profits because at some stage something will come along to upset the apple cart. Very thin margins on very large volume businesses.

Their refinery space is interesting. It has done extremely well. His favourite would probably be Marathon (MRO-N) which is all built on crack spreads, basically the differential between input costs (oil) and output (refined products). Right now, crack spreads are pretty wide, which has helped the refiners.

(Market Call Minute.) You don’t want to be anywhere near refineries at this time.

(Market Call Minute.) Thinks you are getting a squeeze on the refiners in the US. They’re getting under a little pressure.

On anything to do with energy, the season tends to end in early October. In energy, you have had the majority of the move. This one has had an okay move recently. Doesn’t know if he would be interested in owning the stock after the next few weeks.