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.