At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Veni, vidi, Valero!
On a pretty good day for the markets overall, shareholders of oil refiner Valero (NYSE: VLO) seemed happier than most. Why? According to the smart stockpickers at RBC Capital Markets, a kink has developed in the oil supply system over in Oklahoma -- and it might make Valero rich.

Oil comes in many flavors, from many locales. Oil sourced from Europe's North Sea, labeled "Brent crude," is selling for about $104 a barrel these days. In contrast, Texan "West Texas Intermediate" oil has run into a lack of pipeline space around its depots in Oklahoma. This localized supply glut has forced prices down to as little as $85 a barrel on WTI oil ... And I'll give you three guesses which lucky oil refiner gets about 15% of its oil from those Oklahoma depots.

Um, Valero?
Right. Valero is currently benefiting from access to oil that costs about 18% below the going rate for Brent. According to RBC, this kink in the supply chain, along with Valero's access to certain cheaper, "sour" Mexican oils that Valero's particularly good at refining, is proving very lucrative indeed to the refiner. Lucrative enough that it has convinced RBC to upgrade Valero all the way from "sector perform" to "top pick" -- about a notch above a mere "buy" rating.

Incidentally, Valero's promotion was accompanied by Holly's (NYSE: HOC) demotion from the "top" spot in RBC's portfolio, based primarily on valuation concerns. In other refining news, the analyst promoted Western Refining (NYSE: WNR) all the way from "underperform" to "outperform" yesterday. Valero stands above the rest, says RBC, as "the most complex refiner," best suited to processing sour "Canadian, WTI, or WTI-linked crude oil."

Let's go to the tape
So why should anyone care what RBC thinks about Valero -- or Holly or Western Refining, for that matter?

Well, frankly, RBC is one darn fine oil-stock picker. Out of the many industries that this stock shop covers, RBC easily spends the most time on "Oil, Gas and Consumable Fuels" stocks. Over the past four years alone, the analyst has made 113 separate recommendations in this industry. More importantly, it's gotten most of those recommendations right:


RBC Said:

CAPS says:

RBC's Picks Beating S&P By:

Petrohawk Energy Outperform **** 33 points
Chevron Outperform **** 14 points
ConocoPhillips Outperform ***** 25 points

Across more than100 recommendations, RBC's record of 60% accuracy testifies to the analyst's skill in picking winning oil & gas stocks. Yet no investor is perfect; RBC has had its share of blow-ups in this industry, including its overly optimistic recommendation of SandRidge Energy back in 2007. Will this week's recommendation of Valero might wind up in that group of great ideas that just didn't work out?

Judging solely from the numbers, I do see a risk in that regard. Right now, Valero sells for more than 51 times earnings -- hardly a bargain price. Fast-forward a year, to the other side of the oil refining cycle, and most analysts agree with RBC that Valero's profits will grow enough to push its "forward" P/E ratio down below 10. That's considerably cheaper, but is it cheap enough?

The current consensus opinion on Valero argues that even if the company succeeds in turning a corner in 2011, over the long term, we can only hope for Valero to grow its profits sustainably at about 6% per year, on average. That's not particularly fast, and I'm not at all certain it justifies paying 51 times the kind of earnings we know Valero can produce -- just because we hope it can produce better profits in the context of a short-term quirk in the Oklahoman oil supply chain. (There's also management's promise, expressed within last month's fiscal 2010 earnings report, to increase its capital spending this year by roughly 26%, to $2.9 billion. As that spending filters through to the income statement, it's bound to depress earnings somewhat.)

Foolish final thought
If RBC saw no value in Valero today, the numbers I'm looking at would not interest me at all. I wouldn't give the stock a second look at this price.

Even with RBC's endorsement, I'm still not convinced. Maybe I'm being overly conservative, but even an analyst as good as RBC sometimes makes mistakes. At today's prices, I just don't see a big enough margin of safety to justify the gamble.

Chevron is a Motley Fool Income Investor recommendation, but Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 665 out of more than 170,000 members. The Motley Fool has a disclosure policy.

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