Pile of Stocks to Watch Wednesday | Bulls on Wall Street

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  1. While you may already know this I am sharing with you as I wanted to ask if you think we can still put a position on in $WNR as a swing/buy on the dip. I was in this last month (your rec thank you) as a swing but now think this is a longer term and potentially greater return. Let me know if you think we can buy a dip soon

    Crack spreads were sprinting higher yesterday, up more than 3% to $23.68. More importantly, WNR has an edge. Do you know what said edge is?

    Domestic refiners make their money from a multitude of spreads, one of which is gas—another Brent/WTI. WNRhas their refineries in New Mexico, El Paso, Texas and Virginia. They are within delightful proximity to Cushings, Ok aka where the glut supply of WTI is stored. As the world burns, it is my belief the spread between WTI and Brent will widen. As it widens, the executive management team over at WNR will sit back, over a nice tall glass of scotch, and enjoy the ride. Profits will soar. The company will do $7 billion in revenues this year and yet only 35% of the shares are owned by institutions.

    How does that stack up to the other refiners? Let’s have a look.

    HOC: 99%

    TSO: 89%

    FTO: 83% (acquired by HOC)

    MRO: 81%

    HES: 80%

    VLO: 76%

    SUN: 73%

    CVI: 60%

    WNR: 35%

    Furthermore, with WNR‘s earnings set to explode, thanks to widening spreads, coupled with an industry high 25% of shares sold share, I reckon the perfect short squeeze is about to occur. If you are managing money and need exposure to the refiners, you cannot ignore WNR, especially with a FPE of 9 and 35% institutional ownership. Just my two cents.

    The last time crack spreads were this high was 2007. However, keep in mind, there wasn’t an egregiously wide Brent/WTI spread like today. So, in many respects, today’s environment is better for the refiners, providing the whole house of cards thingy holds together. At any rate, one of the things I like to do is look at maximum earnings power during peak cycles. Looking back in time, when a certain industry is at its peak, can really tell you a lot—providing you believe history is about to repeat itself.

    So, I gathered and combined all the 2007 EPS numbers for VLO, WNR, HOC, FTO, ALJ, DK and TSO. I did the same thing with share prices and derived at a group PE.

    2007 combined share price (refiners): $280.53
    -combined EPS: $28.43
    -combined PE: 9.86

    Now, here comes the tricky part. If history is really about to repeat itself, the current analyst estimates are garbage, utterly useless when trying to determine a fair price. So, to placate my inner demons, I took the high end estimates for 2012, even though they may prove to be too conservative. Here are the results.

    Combined current share price: $185.73
    -high end estimates, 2012: $25.22
    -current FPE: 7.36

    Naturally, there is much more to the value of a stock than EPS. One needs to consider macro events, as well as buyout premiums. However, one thing is for certain: if current spreads sustain for a lengthy period of time, analyst estimates are going way the fuck up, in order to catch up with reality. Based upon past history, the refiners are at least 30% undervalued, at current prices—in my opinion of course.

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