In investing, knowing what doesn’t work is just as important as knowing what does. So no review of the oil and gas sector, which Cramer is doing all week, would be complete without putting at least one part of the group in the “Sell Block.” That honor goes to the refiners.
“These stocks have all had huge runs,” Cramer said Thursday. “And unlike the rallies in the rest of the oil patch, I just don’t like this group up here.”
Valero’s soared 49 percent just since Sept. 1, while Tesoro’s up 54 percent over the same period. Cramer urged viewers who owned these stock to take profits.
Not all parts of the oil biz are created equal. High crude prices may benefit the drillers, but they can squeeze refiners’ margins. See, refiners need a Goldilocks-type situation in order to make money: Oil can’t be too high or low, but just right. Otherwise consumers will cut back on their gas spending, making it hard for refiners to pass on their costs.
One-hundred-dollar oil is not good for the Valeros and Tesoros of the world. And others in the business—Marathon Oil and ConocoPhillips —have caught on, and they’re unloading this part of their respective companies. If that’s the case, then why should you hang on to them?
The only refiner that Cramer will recommend right now is Sunoco , which he first got behind back in April.And that’s because of its network of 4,800 gas stations and convenience stores. He thinks these locations have been lost in what many assume is merely a refinery play, causing them to be severely undervalued.
How does he know? By looking at 7-11’s bid for Casey General, a Midwest convenience-store chain. 7-11 valued Casey’s 1,500 stores at $1.5 million a piece, which meant that Sunoco’s 4,800 weren’t fetching anywhere near what they should.
“I think the breakup value here has just gotten more and more compelling and is too big to ignore,” Cramer said. “In other words, Sunoco’s a restructuring play that looks cheap when you value it based on the sum of its parts.”
Plus, CEO Lynn Elsenhans has been tightening up Sunoco, cutting costs and selling off underperforming refineries. And the company also operates in chemicals, coking coal and a pipeline master limited partnership, which help to diversify the business. Cramer thinks that management is further unlocking value by selling off half that chemicals business for $350 million and planning to split the coking-coal division from the rest of the company. The market doesn’t give Sunoco enough credit for these segments, but management’s trying hard to make their value known.
If you absolutely must own a refiner, aside of Sunoco, Cramer said he prefers Tesoro and its new management team. But in the end, SUN is his top choice.
“If you own a refiner, I want you to take profits,” Cramer said. “And if you don’t, I think you should avoid this very tough business with the sole exception of Sunoco, which in this pullback I still think is a buy.”
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