Valero: Growth and Value

02/22/2017 9:00 am EST

Focus: STOCKS

Crista Huff

Editor, Cabot Undervalued Stocks Advisor

Valero Energy (VLO) — which has 14 oil refineries in Canada, the U.K. and the U.S., with a concentration on the Gulf Coast — is a "must have" stock for energy investors, suggests growth and income expert Crista Huff, editor of Cabot Undervalued Stocks Advisor.

Valero is the largest independent player in its industry. Valero is also the general partner and 69% shareholder in Valero Logistics Partners.

Valero reported a strong fourth-quarter 2016 earnings beat in January. The increased profit was attributed to very strong margins in ethanol, and lower tax and interest expenses.

The current quarter is also looking somewhat more productive and profitable than normal. That’s because the refinery turnaround season is ending earlier than usual in the U.S.

In addition, refinery exports are currently running at double the normal five-year pace, as turnarounds and unplanned outages are taking place in foreign markets, many extending through April.

Valero can also appeal to value investors, because it’s got both low debt levels and a low price/earnings ratio (P/E). As a matter of fact, VLO has the second lowest 2017 P/E within its peer group of nine major refinery stocks.

The quarterly dividend, which is often increased at a better-than-annual pace, rose in January from $0.60 to $0.70. The current yield is 4.1%.

The company has $2.5 billion remaining in its repurchase authorization. Basic shares outstanding have fallen by 18% from year-end 2011 through year-end 2016, to 461 million shares.

VLO had a big price correction and recovery in 2016, both beginning and ending the year near 70. More recently, the stock has been trading between $64 and $70, and appears ready to break past $70 in the very near future, assuming no general stock market disruptions.

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I consider energy stocks a must-have for 2017. There are lots of great companies that offer both growth and value right now. Valero Energy is at the top of my energy stock list for outsized capital gain opportunities.

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