Swap Energy Companies

I am today recommending the purchase of refiner Valero (VLO).

While the company faces an unquestionably difficult period with low demand for gasoline, it should start to recover in the second half of the year. Meanwhile, very low crude oil prices should help margins when demand does come back.

While the refining industry is volatile, VLO has averaged earnings per share (EPS) of $6.00 over the past five years, making the stock very cheap considering its future earnings prospects. The company was recently able to sell a total of $850 million three- and five-year notes at rates under 3%, demonstrating it retains a strong credit profile. Buy VLO under $54. My target is $65.

At the same time, I am recommending the sale of Chevron (CVX). The recent rally in the stock has likely considered most of the intermediate-term upside in the shares, considering the now cloudy outlook for crude prices over the next two years. While CVX has refining operations, its earnings are much more tied to exploration and production operations. The weak price of crude will be a weight on earnings even after the coronavirus crisis passes. Sell CVX.

If you are an Inner Circle subscriber following the model portfolio, buy VLO for a 5% position in the Value Sector and sell CVX.