A ranking system sorts stocks from best to worst based on a set of weighted factors. Here at Portfolio123 we have a ranking system which allows the user to create complex formulas according to many different criteria. We also have highly useful several groups of pre-built ranking systems; I used one of them, the "ValueRank," in this article.

The ValueRank system takes into account factors like: five years average yield, ten years compounded sales growth, the latest price to book ratio, the trailing twelve month PE, price to sales, and ROE%, as shown in the chart below.

In order to find out how such a ranking formula would have performed during the last 17 years, I ran a back-test (which is available in the Portfolio123  screener). For the back-test, I took all the 6,272 stocks in our database.

The back-test results are shown in the chart below. For the back-test, I divided the 6,272 companies into twenty groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the rank. The highest ranked group with the ranking score of 95-100, which is shown by the light blue column in the chart, has given the best return, an average annual return of 16.0%, while the average annual return of the S&P 500 index during the same period was about 3.25% (the red column at the left part of the chart). Also, the second and the third group (scored: 90-95 and 85-90) have given superior returns.

After running the ValueRank  system on all S&P 500 stocks on September 24, I discovered the twenty best stocks, which are shown in the table below. In this article, I will focus on the first-ranked stock, Valero Energy Corporation (VLO).

Valero Energy Corporation operates as an independent petroleum refining and marketing company in the United States, Canada, the Caribbean, the United Kingdom, and Ireland. It operates through two segments, Refining and Ethanol.

Valero Stock Performance

Year-to-date, VLO's stock is down 21.3% while the S&P 500 index has increased 5.9%, and the Nasdaq Composite Index has risen 6.0%. However, since the beginning of 2012, VLO's stock has gained 164.5%. In this period, the S&P 500 Index has increased 72.1%, and the Nasdaq Composite Index has gained 103.7%. According to TipRanks, the average target price of the top analysts is at $67.50, representing an upside of 21.3% from its September 23 close price, which appears reasonable, in my opinion.

VLO Daily Chart

VLO Weekly Chart

Charts: TradeStation Group, Inc.

Dividend

The annual dividend yield is high at 4.31% and the payout ratio only 33.8%. The annual rate of dividend growth over the past three years was very high at 37.8%, over the past five years was also very high at 53.4%, and over the last ten years was high at 24.5%.

Valuation

Regarding its compelling valuation metrics, VLO's stock, in my opinion, is considerably undervalued. The trailing P/E is very low at 8.95, its forward P/E is also very low at 10.69, and its price-to-sales ratio is exceptionally low at 0.33. Furthermore, its price-to-free-cash-flow ratio is very low at 10.81, and the Enterprise Value/EBITDA ratio is also very low at 4.13.

Conclusion

Regarding its compelling valuation metrics, VLO's stock, in my opinion, is considerably undervalued. The trailing P/E is very low at 8.95, and the Enterprise Value/EBITDA ratio is also very low at 4.13. Moreover, VLO's stock is ranked first among all S&P 500 stocks according to the powerful "ValueRank" ranking system. Also, the company generates strong free cash flow and returns substantial capital to its shareholders by stock buybacks and increasing dividend payments currently yielding 4.31%. The average target price of the top analysts is at $67.50, representing an upside of 21.3% from its September 23 close price, which appears reasonable, in my opinion.