An Ethanol Stock Watchlist (ADM, VSE, PEIX, MGPI, ANDE)

I believe trading ethanol stocks represents a strong speculative opportunity against rising crude oil prices. Corn and bio-waste ethanol fuels are a hot alternative energy source to gasoline. As crude oil prices rise, I expect to see ethanol stocks continue to post gains.

I believe the greatest future opportunity in ethanol stocks will be with companies that serve or produce ethanol in emerging markets. Consumers in emerging markets are having a difficult time absorbing the high cost of fuel. Brazil is currently the world’s largest producer of ethanol, followed by the U.S. in second and China in third place.

There is a lot of worry about ethanol being an alternative energy fad. Ethanol has been around since the 1970’s and only until recently has the cost of production to energy output ratio been in ethanol’s favor. In the past, the inverted cost to energy output ratio meant every dollar spent on ethanol production yielded less than a dollar’s worth of energy output. Due to manufacturing efficiencies and technology improvements, ethanol now gains more energy output than each dollar spent on production.

I believe ethanol is here to stay as an alternative fuel source to gasoline. In the long-term I expect to see global ethanol use grow. I do believe ethanol stocks have been driven up in a speculative frenzy, but I also believe there is room to grow so long as crude oil prices remain high.

Here is my current watchlist of ethanol related stocks:

Archer-Daniels-Midland Company (ADM)
VeraSun Energy Corporation (VSE)
Pacific Ethanol, Inc. (PEIX)
MGP Ingredients, Inc. (MGPI)
The Andersons, Inc. (ANDE)

Here is a quote from a recent Jim Cramer article entitled “Ethanol: Live Fast, Die Young, Take Profits”

Ethanol is in the last stage of a speculative fad’s life cycle. I know this because we see it all the time in these hot sectors.

We saw it with the dot-coms in 1999, with the power merchants in 2000, with the oil service names last year and into this year and with solar power. Now ethanol is following the same pattern.

I believe there are key differences between ethanol’s speculative frenzy and that of the .com days that Jim Cramer draws a comparison with. Ethanol is a commodity much like gold and is now a viable cost to energy efficient alternative to gasoline. I see two major differences between the .com days and the current ethanol bubble.

The first difference is that most of the attention to ethanol has been concentrated in the U.S. During the .com days you could go anywhere in the world and talk about websites and .com ideas that would cause people to get excited. Talk about ethanol with financial professionals in Hong Kong or Shanghai, both relatively sophisticated global economic hubs, and few people will know what you are talking about. In the U.S. however ethanol is clearly a buzzword, but globally I don’t believe ethanol has the same type of speculative hype or education among financial professionals found in the USA. A lack of publicly traded ethanol stocks in emerging markets is also to blame for the lack of interest in the industry.

The second difference is that a real business model exists for ethanol. Dot com revenue models were murky but ethanol revenue models are simple to understand. Ethanol has a cost and sale price. Emerging markets will fuel strong interest in ethanol for many years to come.

I believe a crash in ethanol stock prices is inevitable, given the speed at which stock prices have been driven up. Long-term I believe a price correction will present the same type of opportunities that the .com crash presented with stocks like Yahoo! Inc. (YHOO), eBay, Inc. (EBAY) and Amazon.com, Inc. (AMZN). I don’t see a crash happening anytime soon. Ethanol interest will remain high as long as crude oil prices stay high. There is too much unrest in the Middle East and fears over a looming war on the scale of World War II for oil prices to dramatically drop.

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Comments

[Jim Nollman:]

I'm folloqwing a few other biofuel stocks. Any comments you'd care to make on GSPI and VRDM? Both are involved in developing technology that quickens the process for creating fuel from waste.

2006 Jun 19 12:19 PM