June 23, 2013 in Business

Much-maligned Valero Energy brings compelling potential

Universal Uclick
 
Associated Press photo

A Valero Energy Corp. oil refiner operates in Wilmington, Calif.
(Full-size photo)

Valero Energy (NYSE: VLO) was recently one of the cheapest stocks in the S&P 500. Having both fans and doubters, it deserves some consideration for a berth in your portfolio.

Based in San Antonio and sporting a market value north of $20 billion, Valero is one of America’s largest oil refiners and ethanol producers. Its stock doubled in value over the past year, and yet it still looks compelling, with its price-to-earnings (P/E) ratio in the single digits and a solid dividend yield. (Its dividend has grown by about 8 percent annually, on average, over the past five years.)

Valero has been profiting from strong international demand for energy products. Naysayers don’t like Valero’s vulnerability to volatile commodity prices and worry that the company may suffer from proposed regulations requiring cleaner gasoline. Bulls see a lot of promise in the U.S. shale boom and like that Valero (and others) has been buying thousands of rail cars in order to transport inland crude to its refineries.

Valero has also made investments in next-generation biofuel technologies such as green crude and algae farms, although each will take considerable time to prove effective at commercial scale. No company or stock is a sure thing, but Valero has been looking intriguing at recent levels. If management executes well, there could be a lot of upside to this oil stock.

Ask the Fool

Q: Once I decide to invest in a mutual fund or a stock, how do I actually do it? – R.B., Honolulu

A: You can invest in most mutual funds either through an account you set up at a brokerage, and/or through the mutual fund’s parent company (such as Vanguard or T. Rowe Price). Some funds have small minimum initial investment requirements, such as $500 (compared with $10,000 or more for other funds).

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My smartest investment

The smartest move I ever made, many years ago, was getting out of a big brokerage and transferring all my money to AARP, which charged relatively little. At the brokerage, my money was just sitting there, doing nothing, while I was charged very steep annual fees. – J.R., Las Vegas

The Fool responds: Many years ago, traditional full-service brokerages did charge steep fees. That’s partly what drove the growth of discount brokerages that started out with fewer services but lower fees. Today, there are many solid brokerages charging relatively little and also offering many services, such as banking, retirement planning, mutual funds, annuities and more. (Learn more about some good ones at broker.fool.com.)

AARP still offers financial services, such as immediate annuities and insurance. It has partnered with Schwab, for example, providing financial advising and brokerage services. (Learn more at AARP.org.)

It’s great that you realized how harmful steep fees can be. If a firm is taking hundreds of dollars from your account every year, it better be more than making up for that with great performance. Otherwise, it’s just shrinking your nest egg, which could grow elsewhere.

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