Imperial Sugar: 'Sweet' Ethanol Long Play, or Commodity Boom Bust-in-Progress?

My grandmother, an inspiration to me who has been investing and trading stocks since the 1940's, recently bought Imperial Sugar (IPSU) (price: $32.74 as of today's close). She asked me what I thought, here is my reply:

The stock has great momentum recently and looks cheap at a P/E of 12. Though forward earnings predictions (according to First Call) look much lower - likely based on lower predictions for sugar prices. That gives a P/E of 15 against predicted 2008 earnings.

So why have sugar prices been going up and why are they expected to decline? Sugar prices have been going up because of ethanol. Sugar is the best thing to make ethanol out of. The only reason the US is making it from corn is because of subsidies (and a special tax on Brazilian ethanol). Oh yeah, and the state with the largest influence on the presidential election produces huge amounts of corn. And its farmers receive massive government handouts. Whoever thought up the Iowa Caucus deserves an award from the economy of Iowa.

Grandma is a very astute stock picker, I can't remember ever being right when I go against her. But watch out for sugar prices to drop as oil prices drop. If I were betting on energy prices to increase, I'd rather own an oil company - they are so much cheaper on a valuation basis. I'll watch Imperial Sugar from now on and maybe pick some up on a fallback. I definitely don't want to own corn.

IPSU 1-yr chart:

Disclosure: I do not own Imperial Sugar (IPSU) though I may buy on a price decline. I do own several oil companies not directly mentioned. Conoco-Phillips (COP), Occidental Petroleum (OXY), Chevron (CVX), British Petroleum (BP) and Statoil (STO).

Disclaimer: Nothing in this web log is meant to be a recommendation to buy or sell.

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[WC Whiner]

I think staples are a pretty good place to be, but Imperial Holly went bankrupt once, and not in 1931, but 2001. I have no opinion on their stock, but you might have mentioned it.