Friedman Billings downgraded shares of Giant Industries (GI), Valero Energy (VLO), and Frontier Oil (FTO) to underperform from outperform.
Analyst Jacques Rousseau says the downgrades are based on valuation. He notes although fundamentals in the sector are favorable, with refining stocks having increased 20% to 25% on average in 2004 (on top of 88% increase in 2003), they are now trading beyond their historical peak-cycle valuation level, and recommends investors take profit on the sector.
Rousseau notes that history points toward falling stock prices and refining margins in the second quarter. Still, he sees a few more positive catalysts before the trend ends in April, as more positive inventory data is reported and other analysts raise estimates.