Diesel is About to Break (Here's How I'm Trading it)

The same diesel spike created a 143% winner and a 30% loser.

I think a reversal could create the opposite trade.

Valero (VLO) has been one of the main beneficiaries of record diesel prices, seeing its EPS jump from $2.28 to $12.54…

Without any throughput change.

Which can explain why shares are up 143% on a year-to-date basis.

However,

Gains came from price, not volume.

And stocks don’t pay you for today’s earnings, they pay you for being right about tomorrow’s.

And the market’s vote is that Valero’s earnings will normalize into the next 12 months, explaining why it commands a lower P/E than it did a few months ago.

Now look at Valvoline (VVV.)

Total opposite, as rising diesel and crude prices get passed down as input costs for its lubricants and motor oil products.

Also why the stock is down 30% year-to-date.

But something interesting happened last quarter…

VVV expected 100bps of EBITDA margin reduction, and management just cut that decline in half while reporting 8% same-store revenue growth.

That type of operating leverage and efficiency is the reason why markets are willing to pay a P/E premium backed by massive EPS growth.

Growth that only materializes IF diesel prices normalize.

What’s interesting about today’s setup is that the market now prices these companies as if diesel prices were about to collapse.

My research shows markets may as well be right to call for lower diesel prices by year’s end.

Today, we’ll take that research - along with the market’s vote - and turn it into an idea that pays.

Not because I know exactly when diesel falls.

But because the structure gives you two different ways to benefit when economics eventually normalize.

Let’s get into it.

Diesel is about to break (here’s how I’m trading it.)