Oil price

Both general economy and stock prices of many enterprises depend on the price of oil.

The 2014 drop in oil prices helped or harmed many stocks. But also, some stocks seemed to be under constant pressure of oil prices (being low or being expected to rise).

On one hand, extraction companies are lower, perhaps rightfully so. Many firms have a lot of debt and even with low valuations are a risky bet. There are also refiners and other companies that market perceives as dependent on oil price (e.g. CBI - construction company that does some projects for oil-related industries, but not that much and not all could be hurt by low oil price).

I think car producers, which have record profits thanks to SUVs and trucks are thought to lose a lot of profitability once gas prices rise and car-buying cycle reverses.

I think that the shale revolution will keep oil prices in check for a long time because the extraction methods and tools will become less and less expensive, but also, with advancing technology, more oil can be extracted from current and already shut-down oil/shale fields.

General Motors (GM) and Ford (F)

Intrinsic Value: $43.8, Current Price: $34.2

Both Ford and General Motors are very cheap. I think market discounts the cyclical nature of the auto market and fear that easy money from selling high-margin SUVs and trucks will go away with increased oil prices. I think that low oil prices are hear to stay, primarily because the shale oil extraction will jump everytime price goes above the cost of extraction. And shale extraction cost will get lower with increased efficiencies and new technologies.

As I understand both Ford and GM can keep profitability even with ~10M auto sales in US, down from current ~18M. And they generate nice cash-flow.

The other concern might be self-driving cars. I think that self-driving cars (as a service) will be quite popular in US 5 years from now, which will negatively impact total auto sales. Still, the impact will be gradual and I think that ease of use and reduced congestion will significantly increase demand for ‘mobility’ services, and will partially offset greatly increased utilization of each deployed self-driving car.

Valero (VLO)

While Valero’s results are very volatile, the normalized earnings looked attractive and I bought a small position close to 2016 low. The dividend yield seemed attractive and safe and the long-term prospects of the business do not depend much on price of oil. Now sitting on 30% unrealized, I contemplate locking these gains.