Since my article on these tech gems, the stocks have logged total returns of 15.7% and 13.4%, respectively. Meanwhile, the S&P 500 is up only 5.7% over the same time frame.
It seems as though the market is starting to appreciate just how attractively valued these two stocks have become.
But that analysis wasn’t just a one-off exercise. We can apply the same methodology to other sectors and industries, as well.
It just so happens that there are two companies within the energy sector that look fantastic based on the same metrics, and they can even help you profit from persistently high gasoline prices.
The fuel that winds up in your gas tank has been transformed to make it suitable for combustion.
Refiners take the thick, black crude oil extracted from the Earth’s crust and process it into petroleum products such as gasoline and diesel fuel.
Ultimately, if refiners can find cheap crude and turn it into expensive gasoline, then they can be very profitable.
And this is exactly what’s been happening…
The price of retail gasoline in the United States is actually priced off of Brent Crude, the international oil standard – and not West Texas Intermediate (WTI), the U.S. oil standard. Brent is currently trading around $102 a barrel, and WTI is approximately $93.
Needless to say, this spread between Brent and WTI represents more opportunity for refiners.
This spread may persist, too.
Burgeoning oil production from the Bakken formation in North Dakota and the Eagle Ford formation in Texas has kept a lid on WTI due to increased supply – thus driving a wedge between the two crude oil benchmarks.
Interestingly, zero new refineries have been built since the 1970s. Instead, technological advancement has been required to increase supply to meet increasing petroleum demand.
Indeed, robust foreign demand has been a boon for the U.S. refining industry. The chart below shows the skyrocketing volume of U.S. finished petroleum exports.
The macro picture certainly has been positive for refining businesses. But instead of charging into the industry head on, let’s stack the odds in our favor a bit more.
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They may not have outsized dividend yields, but these two companies are growing their dividends very quickly. Remember, fast dividend growers tend to outperform.
Companies with low enterprise value-to-EBITDA (EV/EBITDA) ratios also tend to outperform the market. Based on this golden ratio, both MPC and VLO have insanely cheap total valuations.
Perhaps these refiners are inexpensively valued because the market is fearful the crude oil export ban will be lifted, collapsing the Brent-WTI spread and crimping refining margins.
This is actually refreshing because far too many companies in this market are priced to perfection. In our current environment, it’s rare to find stock prices that actually reflect some type of serious risk… or should I say any type of risk!
Low EV/EBITDA ratios also mean these companies aren’t overly leveraged. The combination of low valuations and reasonable debt levels paves the way for capital-efficient stock buybacks.
Marathon Petroleum has been very aggressive in buying back shares over the past year. This has reduced its float by over 10% and given the stock a stellar total yield (net buyback percent plus dividend yield).
Far too many companies that are priced to perfection are also conducting buybacks, but that’s not something you have to worry about with either MPC or VLO.
In addition to fantastic metrics, Valero and Marathon have stellar managements, which are diversifying their companies’ businesses. For example, Valero now has 11 ethanol plants and a 50-megawatt wind farm. And Marathon aims to reduce its refining contribution to EBITDA to a little more than half of the total, from more than three quarters currently.
Bottom line: MPC and VLO have high dividend growth, good total yields, low EV/EBITDA multiples, and are positioned to benefit from several macro tailwinds.
Cumulatively, these factors give both stocks a great shot at outperforming the market.
Safe (and high-yield) investing,
Alan Gula, CFA