. Relative to refiners, the crack spreads are cyclical. All one has to do is graph them and realize that they can be easily cut by two-thirds and still be healthy
agreed.
But at that level, they do not generate the margins that are causing these equity prices.
there i don't agree. today's margins are not "causing" today's equity prices, at least in VLO's case. if VLO were priced based on current margins, it would be a $250 stock. at current margins it probably has a run-rate PE of less than 3. in other words, NOBODY believes margins will stay at these levels.
in fact, your idea of selling ahead of the margin decline is the single greatest consensus position out there. even that dingbat Cramer says sell VLO based on exactly the same logic you expressed.
i still have shares of VLO i bought at split-adjusted 6 around 2002. the ENTIRE time, VLO has been a single-PE stock. always, analysts underestimate the earnings. yet somehow the stock is up 12x from those levels.
admittedly, it is very hard to hold the stock in the face of all the mass media conformist pessimism, in the face of the "knowledge" that spreads will decline and decline hard, and the "obviousness" that the stock will get whacked when it happens. i have a relatively small position and would in fact welcome a pullback. but i find it equally hard to be out completely, knowing that the stock is very cheap even at much lower margins. |
