Insiders Step up at Western Refining

06/02/2016 8:00 am EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Based in El Paso, Texas, our latest featured stock idea owns and operates oil and gas pipelines, storage tanks and terminals in the Southwestern United States” states Mark Skousen, editor of High-Income Alert.

Western Refining Logistics (WNRL) has approximately 300 miles of crude oil pipelines and more than a half million barrels of active crude storage.

Pipelines still offer by far the cheapest way to ship oil and gas over long distances. Trains and trucks offer some competition, but pipelines are much less labor-intensive and require little maintenance.

Furthermore, there are significant barriers to entry. Acquiring the regulatory approval to build a new pipeline is a long and difficult process. And the significant investment required generally stops new competition in its tracks.

In the most recent quarter, however, earnings at Western declined 9% -- and the stock is down nearly a third from its 52-week high.

Blame the rebound in oil prices. Prices at the pump are slow to fall when oil is coming down but quick to rise when it goes back up. While some consumers believe this is some sort of market manipulation, it’s not.

History shows that when oil prices are going up, consumers will drive out of their way to save a nickel or a dime per gallon. But when prices are going down, they’re so happy to be paying less than what they were that they do less comparison shopping. That allows refiners and retailers to charge more.

It also means refiners have bigger margins when prices are falling and smaller ones when they are rising. And oil prices have taken a big bounce since the first-quarter lows.

But those margins -- and profits -- are about to change. The Street now estimates that Western Refining will earn $1.52 a share this year and $1.78 in 2017. And even this 17% growth in earnings per share may be too conservative.

CEO Jeff Stevens just purchased 138,000 shares, an investment of $3 million. Two directors also made seven-figure purchases, one of them for $6 million.

Clearly, they believe the selling has been overdone and Western Refining is undervalued at these levels. (And they made their buys at $21.73 a share.)

Of course, we always insist on getting paid with our investments. So you’ll be happy to know we’ll also collect a 7.34% yield here.

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By Mark Skousen, Editor of High-Income Alert

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