Two major events happened on Thursday, which 99.9% of investors didn't know about.
The fortunate few who did - and who were savvy enough to act on their knowledge - are poised to reap serious profits. Today I'll tell you what these investors knew, what happened Thursday, and, most importantly, how you can profit from what's going to happen next.
We begin with five brief background notes.
- The United States uses 382 million gallons of gasoline every day. Not only is gasoline "dirty," it's also derived from oil. And though there's plenty of oil for the foreseeable future, it's ultimately a finite resource that the world is going to exhaust.
- After considering America's utter dependency on foreign trading partners to meet its energy needs, and with environmental concerns in mind, Congress surveyed the technological landscape in search of an alternative, a new, green energy solution that could help wean the country from oil. It came up with biofuel.
- The 2007 Energy Independence and Security Act, passed and signed in the Bush era but supported by President Obama, establishes a federally mandated timetable for the production of biofuel. This contains three components. The first is "Renewable" fuel, which is traditional corn-based ethanol. Current production is about 12 billion gallons a year, and the timetable pushes ethanol to a ceiling of 15 billion gallons in 2015, where the target remains until 2022. The second biofuel in the timetable is biodiesel, which, at this point, is not significant. But the third is: It's an "Advanced" biofuel called cellulosic ethanol.
- Cellulosic ethanol is made by converting the sugar in all plant life, called cellulose, into alcohol. (You do this backward, incidentally, every time you have a drink.) This process can be accomplished several ways but the most promising is using enzymes to push the process along. Cellulosic ethanol can be blended with traditional motor fuels like gasoline. The current Environmental Protection Agency (EPA) standard allows for up to 10% ethanol, though that's slated to rise to 15% and some in Congress have sought to push it higher. So-called "flex-fuel" vehicles can burn up to 85% ethanol, or "E85," which you may have seen advertised.
- While the federal timetable limits corn-based ethanol to +25% growth, the output from 2010 levels will rise from 6.5 million gallons this year to 16 billion gallons in 2022, an increase of an astonishing +246,053%. I should note, however, that this was not Congress' intent. The original law called for 100 million gallons a year but the timetable was amended by the EPA. The growth rate from 100 million gallons to 16 billion gallons is still +15,900%.
Now I want to tell you the two things that happened Thursday:
Item No. 1 - Wall Street endorses the inevitable future of cellulosic ethanol.
Thursday morning shares of a company called Codexis (CDXS) went on sale through an initial public offering. Codexis, an enzyme maker, is a joint venture of Royal Dutch Shell and some other investors, notably a little pharma company called Maxygen (MAXY).
Codexis is a serious biofuel player because of its connection to Shell and because of a recent $12 billion deal between Shell and Brazil's Cosan (CZZ), one of the largest ethanol makers in the world.
There's a lot of inside baseball with these deals, but the bottom line is this: Big Oil is behind cellulosic ethanol because it sees it as the next chapter in energy. Thursday's IPO was further evidence that Wall Street is taking notice of the huge profit potential. The IPO rose modestly its first day and was up again this morning.
Item No. 2 - A major producer makes a projection.
Poet, a privately held ethanol producer, one of the country's largest, made a big projection. It said it would produce 3.5 billion gallons of cellulosic ethanol by 2022. That was a year familiar to followers of the biofuel story: It's the last year in the federal government's timetable. Poet is claiming it will produce 22% of the country's cellulosic ethanol. It will derive its cellulosic ethanol from biomass like wheat straw, switchgrass and municipal waste.
CEO Jeff Broin said Congress has set "a lofty goal." He's right. But this nation is in the business of achieving lofty things. We have smart people who figure things out. And though the road of discovery has been long, there is no reason that Congress' goal can't be reached. There is no reason it can't be exceeded.
The takeaway for investors is not about Poet and it's not even about Codexis. The takeaway is that cellulosic ethanol technology is ready. This technology can be profitably used. The science has been worked out. It's no longer an experiment talked about in college labs. Using enzymes to create biofuel on a massive commercial scale is no longer a utopian dream. It's a reality. It's coming. Big oil is betting on it. Wall Street is on board with financing. Uncle Sam has written the demand into law and is funding some plants itself. All of these factors will converge in the coming years to deliver Gold Rush-size profits.
The question is who is going to strike it rich and who is going to go bust.
One of the leaders in cellulosic ethanol is a company called Dyadic International (DYAI.PK). This company has already delivered a +200% gain to readers of my Government-Driven Investing newsletter. Dyadic is an enzyme maker whose technology is vital to the production process. Codexis, in a regulatory filing, said that losing its relationship with Dyadic would materially affect its ability to do business.
Through non-exclusive licensing, Dyadic will receive a royalty on billions of gallons of cellusosic ethanol a year - without building expensive refineries or pipelines. All it has to do is deliver its enzymes and collect a check. As it does, this tiny company could well see price appreciation to match the +15,900% growth that cellulosic ethanol will see. I don't think I've ever seen a company with more potential.
The two things that happened Thursday are a trend. More cellulosic ethanol news will go unnoticed by investors. By the time it's on the evening news, the investment opportunity will be gone and the lion's share of the gains will have been earned by someone else. The time is now. Dyadic looks like a strong buy.
Disclosure: No positions