Is Valero Worthy Of Additional Shares In A Portfolio Now?

| About: Valero Energy (VLO)

Summary

Fundamentally, I believe the company to be inexpensively valued now on next year's earnings estimates and on earnings growth expectations with great near- and long-term earnings growth expectations.

Financially, the company does pay a great dividend and has decent financial efficiency ratios.

On a technical basis, the risk/reward ratio shows me there is more reward than risk right now.

Having opened my position in Valero (NYSE:VLO) in late February of 2017, and given the fact that it is trading near its 52-week highs, I believe it is a great time to investigate what is going on with this stock. The stock is off to a horrible year moving lower by 4%. The company was recently selected as Goldman Sachs' favorite refiners for the year. I own the stock in my Portfolio of 12 and the stock hasn't performed to my expectations. I feel it is important to examine the specific valuation, financial, and technical situations of Valero to see what is really going on with the stock right now.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 13.31, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 10.6 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $6.18 per share and I'd consider the stock inexpensive until about $93. The 1-year PEG ratio (0.58), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is inexpensively priced based on a 1-year EPS growth rate of 22.97%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 22.97%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 20.32%.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 4.27% with a payout ratio of 57% of trailing 12-month earnings while sporting return on assets, equity and investment values of 5%, 11.2%, and 10%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 4.27% yield of this company is good enough alone for me to take shelter in for the time being. The company has been increasing its dividends for the past seven years at a 5-year dividend growth rate of 54.3%.

Technicals

Source: Stockcharts.com

Looking first at the relative strength index chart [RSI] at the top, I see the stock is in middle ground territory with a current value of 43.59 relative to the rest of the market. Usually a value of 30 indicates an oversold condition. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars increasing in height which tells me bullish momentum is probably about to mount in the name. As for the stock price itself ($65.57), I'm looking at $67.18 to act as resistance and $64.53 t o act as support for a risk/reward ratio which plays out to be -1.6% to 2.5%.

Wrap Up

Fundamentally, I believe the company to be inexpensively valued now on next year's earnings estimates and on earnings growth expectations with great near- and long-term earnings growth expectations. Financially, the company does pay a great dividend and has decent financial efficiency ratios. On a technical basis, the risk/reward ratio shows me there is more reward than risk right now.

I actually initiated my position in Valero in late February and have been pretty unhappy with the purchase thus far. I will only be purchasing shares if they are below $59 because I believe that is where it offers additional value. I've selected $59 because it is the average of the 52-week range.

I swapped out of Skyworks Solutions (NASDAQ:SWKS) for Valero during the 2017 first-quarter portfolio change-out because I ended up turning a profit in the name (20.4% or 110.8% annualized) and wanted to lock in those gains. Since the swap I have lost out on gains. For now, here is a chart to compare how Skyworks and Valero have done against each other and the S&P 500 since I swapped the names.

Source: Google Finance

When it is all said and done, it matters what the stock has done in an investor's portfolio. For me, Valero is one of my smallest positions and has been doing poorly, as I'm down 4.9% on the name, while the position occupies roughly 3.5% of my portfolio. I own the stock for the value portion of my portfolio, and I will continue to hold onto the stock for now. My portfolio is up 17.2% since its inception while the S&P 500 is up 13.3%. Below is a quick glance of my portfolio and how each position is performing. Thank you for reading and I look forward to your comments!

Company

Ticker

% change incl. DIV

% of Portfolio

Facebook, Inc.

(NASDAQ:FB)

15.8%

9.8%

AbbVie Inc.

(NYSE:ABBV)

12.0%

4.1%

PulteGroup, Inc.

(NYSE:PHM)

5.9%

3.9%

3M Company

(NYSE:MMM)

1.5%

3.7%

Wyndham Worldwide Corporation

(NYSE:WYN)

1.1%

3.7%

SEI Investments Company

(NASDAQ:SEIC)

0.0%

7.3%

General Electric Company

(NYSE:GE)

-1.7%

8.1%

Silver Wheaton Corp.

(NYSE:SLW)

-3.9%

10.3%

Valero Energy Corporation

-4.9%

3.5%

O'Reilly Automotive, Inc.

(NASDAQ:ORLY)

-6.4%

4.1%

VFC MAY 19 2017 52.50 PUT

(NYSE:VFC)

-16.5%

0.5%

Gilead Sciences Inc.

(NASDAQ:GILD)

-17.1%

18.8%

Cash

$

22.25%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long VLO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also own shares of VLO in my 401k.

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