Gevo: An Undervalued Spec Play With Large Short Interest And Trading Below Cash Value

| About: Gevo, Inc. (GEVO)

The S&P 500 Index ETF (NYSEARCA:SPY) has had a little pull back over the last week, and when the macro market starts to sell off, money usually tends to flood into spec plays. We are now down trending under the 9 EMA on the daily chart, and will soon be confirming the move this week in my opinion.

The Background:

Now, as I was looking for new opportunities, I came across a speculative small cap company called Gevo Inc (NASDAQ:GEVO). The business summary of the company is found below..

"Gevo, Inc., a development stage renewable chemicals and biofuels company, focuses on the development and commercialization of alternatives to petroleum-based products based on isobutanol produced from renewable feedstocks. The company develops Gevo Integrated Fermentation Technology, an integrated technology platform for the production and separation of isobutanol. Isobutanol is a four carbon alcohol for use as a specialty chemical or a value-added fuel blendstock, as well as could be converted into butenes, which are primary hydrocarbon building blocks used in the production of lubricants, rubber, plastics, fibers, other polymers, and hydrocarbon fuels. It also produces and sells ethanol and related products. Gevo, Inc. has a development agreement with BioFuel Energy Corp for production of isobutanol. The company was formerly known as Methanotech, Inc. and changed its name to Gevo, Inc. in March 2006. Gevo, Inc. was founded in 2005 and is headquartered in Englewood, Colorado."

There are many spec plays going around, but this is one that I think could eventually be bought out. However, on their own they can license production technique as well as sell a product directly to the market. The current administration in Washington has emphasized the importance of renewable energies and are creating a climate for companies like this to thrive. I detail many reasons below on why I think this could be the next big runner.

Trading Under Cash Value

At the current price on 2/26/13, GEVO is trading at 1.90 per share. They have $2.33 cash per share and are currently sitting at 17.17% under cash value. With the increased media attention lately, it could easily get back to this level and soar much higher in my opinion.

Huge Short Float

GEVO currently has 6,343,922 or 30.6% short interest (as of 1/31/13), which is a very large portion of the total 32.8 million shares in the float. That does not include the high share count that is also tied up from institutional owners (42%). Any catalyst such as resumption of ISO production, additional partners or contracts, as well as the share buyback program (mentioned later) could trigger a huge short squeeze like what was recently seen in Parkervision (NASDAQ:PRKR) or Herballife (NYSE:HLF).

High Institutional Ownership with Major Oil and Gas Companies Invested

"To have one of the world's largest oil and gas companies invest in Gevo is significant validation of the potential of our technology and products," stated Dr. Patrick Gruber, CEO of Gevo, Inc. "Total SA (NYSE:TOT) adds to the strength of our already strong syndicate of Khosla Ventures, Virgin Green Fund, Burrill & Company, and Malaysian Life Sciences Capital Fund."

With major names backing the share price and tying up 42% of the float, it gives the share price plenty of room to run to the upside as it shrinks the available amount of shares to be bought.

Huge Patents Granted

Patent filed 07, and granted on 2/19/2013 for renewable jet fuel. When you think of the burden rising fossil fuel costs the airlines and military you can see the opportunity presented here. GEVO has 450 patents (or patent applications) as of today. I'm not an expert in intellectual property (IP), but at current market cap of only $76.1 million, I'd imagine the IP could be valued at just as much as or greater than current valuation. When you think of where the future is headed, it becomes a scary thought. What do we know about peak oil? The only solution is alternative energy, and these are the guys to go to.

What is Peak Oil?

Peak oil is the point in time when the maximum rate of petroleum extraction is reached, after which the rate of production is expected to enter terminal decline. Global production of oil fell from a high point in 2005 at 74 mb/d, but has since rebounded, and 2011 figures show slightly higher levels of production than in 2005. There is active debate as to how to measure peak oil, and which types of liquid fuels to include. Most of the remaining oil is from unconventional sources. Rough estimates indicate that out of an available 2 trillion barrels of oil, about half has been consumed.

Benefits of Renewable Isobutanol

Renewable isobutanol is derived from renewable feed stocks. On a cost per carbon basis, feedstocks based on starch from corn have historically been significantly lower cost than propylene (the key feedstock for butanols made commercially via the oxo process). Using historical feedstock prices, the estimated cost of isobutanol from renewable feedstocks have experienced less price volatility than petroleum/propylene based isobutanol and would have averaged close to $1.00/gallon lower cost over the last 5 years.

Isobutanol Secures EPA Registration

In 2010, EPA cleared GEVO to be first isobutonol registered producer for use as an additive to gasoline. It produces 30% more equivalent fuel value than ethanol (currently added at around 10% clip to all domestic gasoline) and can be used in any car currently on the road. This is a win win for consumers and the producers. It is also approved to be mixed at a 16% rate by the EPA although many believe even higher blend is possible.

Government Involvement

In 2012 GEVO landed a contract to supply jet fuel to the U.S. Air Force. The contract is worth as much as $600,000. The contract requires Gevo to supply the Air Force with an initial 7,000 gallons, and the fuel will be tested in an Air Force lab before being tested in an A-10 aircraft. The government can order as much as 4,000 more gallons under the contract. Also, Senator Udall met with Chief Executive Officer Patrick Gruber, Ph.D. to discuss renewable energy options and see first-hand the innovative research and development Gevo has done that will enable it to be a leading provider of renewable chemicals and biofuels. The senator states how GEVO can help relieve pressure on foreign oil dependency thus helping national security, as well as create American jobs and reduce cost of oil. Senator Udall (as quoted from Reuters) remarked: "What I love about what Gevo is doing is they're helping create a future where we won't be so dependent, where the U.S. can maintain our superiority and, in the process, enhance our national security, keep innovating, and create jobs. Gevo is brewing new formulas, materials, and chemicals for the fuels of the future." The program where GEVO's fuel was successfully integrated into military aircrafts is also alluded (remember earlier patent in the paragraph above).

Share Buy Back Program

The program is at market and at management's discretion. It will run through all of 2013, or until the entire 15 million is exhausted. Using 50 moving avg. of 2.02 GEVO in theory could purchase 7,425,000 shares back and net what essentially amounts to either 7.82 for the million shares they realistically sold in July since only 5 million shares would remain from that offering with proceeds of $39.1 million.

Analyst Expectations

GEVO has a strong base with analysts backing up the opinions outlined above. Currently analysts have 4 "Strong Buys," "3 'Buys," 1 "Hold" and 0 for "Underperform" or "Sell." On a scale of 1.0 (Buy) to 5.00 (Sell), they have a mean recommendation of 1.6, which is very bullish. The mean price target is 6.21 with 9.00 on the high end.


GEVO is a quality name with a groundbreaking innovation on their hands. They are trading below cash value, have a high short interest, and high institutional ownership. They have patented all the innovations and have landed government deals. Analyst expectations are above average, and the company has a share buyback program of up to $15 million. As an alternative energy source, we will need the company in the future when fossil fuels are gone. GEVO has the solution.

Disclosure: I am long GEVO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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