I love stock market bottoms. Every excellent stock in the U.S. is on sale! However, shares of struggling, unprofitable companies are also cheaper than they were last year, so it’s important to know how to identify the good stocks and leave the bad stocks untouched.
For me, the process is simple: Find companies with strong earnings growth, low price/earnings ratios (P/Es), and relatively low debt levels. I want to know that if I spend the next six months on a desert island without internet access, the companies that I invest in will continue to thrive while I’m gone.
Valero Energy stock certainly qualifies. Valero Energy (VLO – yield 4.3%) is an energy refining and marketing company. Valero manufactures, distributes and markets quality transportation fuels and petrochemical feedstocks. In recent days, Valero Energy closed on its merger with Valero Energy Partners (VLP), which provides transportation and terminaling services. Valero is a large-cap stock, which just reported full-year 2018 sales of $117 billion.
Valero’s annual profits are on a strong growth trend. In 2017, earnings per share (EPS) rose 33.3%. Final 2018 profits increased 24.5%, and analysts expect another 37.4% EPS growth in 2019. Those are surprisingly aggressive and consistent EPS growth rates for a large-cap stock!
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When I quote EPS expectations, I always use Wall Street’s consensus earnings estimates. I don’t cherry pick numbers from the one analyst with the most bullish projections. I’d frankly be pleased if Valero had a 10% earnings growth rate, so anything above 10% is icing on the cake!
Valero Energy Stock is Undervalued
Due to the recent U.S. stock market correction, the stock’s price/earnings ratio (P/E) is just 11.5, indicating that VLO is solidly undervalued.
Prior to the fourth-quarter 2018 stock market correction, VLO traded at 118 or higher in four different months last year: May, June, August and October. As the stock market recovers to 2018 highs, investors who buy VLO right now at 84 have a realistic price goal of 118—good for a 40% potential capital gain. Ah, the beauty of buying low!
There’s more good news! Valero Energy stock shareholders receive a quarterly dividend of $0.90 per share (just boosted from $0.80 per share!), which adds up to a whopping 4.3% current yield. That means you’ll be paid handsomely to wait for VLO and the broader stock market to fully recover from last quarter’s market correction.
Valero’s basic outstanding share count has fallen 21%, from 542 million in December 2013 to 424 million in December 2018. The company continues to return cash to shareholders in the form of dividends (which it has increased annually every year since 2013) and share repurchases, with a targeted payout ratio between 40% and 50% of adjusted net cash provided by operating activities. The repurchasing activity indicates financial strength – after all, cash-strapped companies don’t waste precious cash flow on share buybacks – and the lower share count boosts EPS, a key number on which professional investors focus.
Valero Energy stock could appeal to investors who have any of the following investment goals: aggressive growth, income, rising dividends, and value. With such a large potential investor base, VLO is likely to perform better than the broader U.S. stock markets in the coming year!
*This post has been updated from an original version.