Ethanol stocks have been on fire during the last month, with Pacific Ethanol (NASDAQ:PEIX) posting gains of more than 275%. The large gains have been a result of record earnings and encouraging data surrounding its production and its balance sheet. The stock’s gains have been consistent and it’s now trading around $1.05 - $1.25, therefore I ask if the stock will regress or trend higher?
Pacific Ethanol is the leading marketer and producer of low-carbon renewable fuels in the Western United States. Back in October the stock was trading at $0.30 a share and today the stock trades with a price of $1.20, and has maintained its value despite substantial loss within the markets over the last week. This shows strength within the stock and suggests that it could possibly trend higher once the market begins to recover.
The stock began to rise after announcing a record earnings report with an all-time best in gallons sold. The company announced earnings on October 26, and has since increased by 280%. Therefore let’s look at a few key points from the company’s earnings report so that we can see what caused the stock to react with such large gains.
- Ninth consecutive quarter of growth in gallons sold.
- Secured management agreement with ZeaChem, which is significant because it represents the company’s first operations & maintenance arrangement beyond the Pacific Ethanol plants which shows the company is growing beyond its operations.
- Net sales at all-time highs at $271.6 million a gain of 490% year-over-year.
- 122.6 million gallons sold which is a 22% increase over last quarter and a 71% gain year-over-year
- 54% increase in average price-per-gallon
- Gross Profit $8.2 million a 105% gain year-over-year.
- First 9 months ending September 30 with net sales of $659.4 million compared to $194.1 million year-over-year.
- Net income of $4.35 million compared to a loss of $12.12 million year-over, which reflects an increase in profit margins.
I believe the gains are well deserved and that this company has made incredible progress. A good way to determine how executives feel about their company’s future is by insider trends, and insiders have been buying this stock with authority over the last year. I believe that this is an investment that investors should feel good about in knowing that it will continue to rise. The company’s chances of re-listing on the NASDAQ are quite high now that it’s maintaining a $1.00 stock price, which should attract additional investors. One of the biggest questions regarding the company’s future was its debt, and it retired $35 million in senior convertible notes, which is huge. This, along with incredible fundamental progress has resulted in strong gains and now that its debt picture is clear investors can feel confident that it can continue to grow.
Overall, I believe that PEIX is one of the better small-cap stocks to own over the next year, and possibly beyond. Ethanol stocks have been on fire as global demand for corn-based biofuel sends exports to all-time highs. Ethanol prices have increased 20 percent the past year as the appetite for biofuels grows and an expiring tax credit has boosted domestic demand. The United States has a large quantity of ethanol and I believe that its demand will continue to rise as we search for cleaner fuels. Ethanol makes gasoline cheaper, air cleaner, and we can back off our dependence on foreign oil. Therefore I believe we will see a large push for ethanol over the next few years and because of the recent strength of PEIX I believe the company is already two steps ahead of the curve. Therefore I see no reason that PEIX won’t make a great investment, and I expect its stock to continue rising with improved fundamentals and a product that is gaining momentum.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PEIX over the next 72 hours.
Additional disclosure: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy but rather informational purposes only.