Why I'm Opening a Position in the Country's Largest Refiner
Here's what I am adding to my portfolio, even as I find the overall market significantly overbought.
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The markets continue to grind higher despite an uncertain election outcome directly ahead, continuing tensions in the Middle East and the ongoing war in Ukraine.
September retail sales did come in a bit better than expected on Thursday. This helped prod the Atlanta Fed’s GDPNow to boost their projection for third quarter GDP growth from 3.2% to 3.4%. Third-quarter earnings reports are starting to flood the wires as well. Investors are being treated to solid results from the major banks and well-followed names like Netflix NFLX early in the reporting season.
I continue to view the overall market as significantly overvalued given the many valuation metrics like price-to-sales ratio that show we are nearing uncharted territory. However, while the music is playing, an investor has to dance or at least get off his seat every so often. I am starting to warm up to the refiners, as that beaten-down sector is seeing some signs of life in recent trading sessions.
I recently noted how I have added to my position in PBF Energy PBF using covered-call orders. The stock is dirt cheap based on peak earnings and that means one can continue to increase their position in the shares. I have recently also opened an initial position in the largest refiner in North America, Valero Energy Corporation VLO. The stock got a rare upgrade from Wells Fargo last week.
While the S&P is trading near the high end of its historical P/E range, the small-cap Russell 2000 fares a bit better on this measure. The small-cap arena provides even more value if you consider that just over 40% of all small caps in the market don’t currently book profits, something its largest brethren don’t struggle with. Therefore, the majority of the tiny number of equities where I am finding reasonable valuations these days strongly tend to be of the small-cap ilk. That is where I am acting upon what I consider the limited opportunities in this overbought market.
I added some to my holdings in non-lethal arms manufacturer Byrna Technolgies BYRN late last week using covered-call orders. The stock had quickly fallen just over 20% when the firm posted quarterly earnings last Wednesday. However, this seems like a knee-jerk reaction. The shares had run up nicely after Byrna provided preliminary quarterly guidance in early September. Byrna also slightly beat actual top- and bottom-line expectations. There was some concern about margin erosion. That said, this is largely because the company decided to invest more in marketing its products. This seems to be paying off, as sales nearly tripled from the same quarter from a year ago within the recently posted results. Non-lethal weapons also seem to be gaining considerable traction amongst consumers, given the continuing worries about the spike in crime since the pandemic.
I also established a starter position in Humacyte HUMA which was recently highlighted by fellow TheStreet Pro contributor James "Rev Shark" DePorre. The stock has surprisingly solid liquidity in its options. More details on why I found Humacyte attractive and the specifics of that transaction will be in my covered-call trade idea which will post this weekend.
At the time of publication, Jensen was long BYRN, HUMA, PBF and VLO.
