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Pacific Ethanol: Buy, Sell or Hold?

|Includes: Pacific Ethanol, Inc. (PEIX)

Ethanol is a low carbon, renewable fuel source that is often heralded as the savior of America's energy independent future.  Derived from common food plants such as grain, corn, sugar cane or potatoes, surprisingly it's the same type of alcohol that is found in alcoholic beverages.  It's primarily used as an additive to gasoline and the use of up to a 10% mix is mandated in some states.  Ethanol is widely used in America and Brazil with most automobiles having the capacity to run on petroleum with up to a 10% mixture of ethanol. 

 

One of the key players in the ethanol industry is Pacific Ethanol (Nasdaq:PEIX).  The company is the leading producer and marketer of low carbon, renewable fuels in the western United States.  The company manages and operates four ethanol production plants of which it maintains a 20% ownership stake.  These plants have combined capacity of 200 million gallons per year when operating at full bore. 

 

The stock has climbed from a low of 37 cents/share in July 2010 to just over $1.20/ share in September, 2010.  Price dipped back down to the 60 cent/share range in November 2010, but has since climbed back toward the highs.  Several major developments have taken place fueling the recent bullish trend.  First, the excise tax credit that was supposed to expire on December, 31 2010, was extended by the Feds for another year.  This tax credit is critical for domestic producers of ethanol to compete against imported ethanol.  Next, in October the EPA decided to increase the allowable ethanol/gasoline mix to 15%.  This E15 mixture will be permitted in all cars built since 2007.   

 

Since Pacific Ethanol was trading below $1, the company was in danger of being delisted from the Nasdaq spooking many investors.  However, it was recently granted a 180 day reprieve from being delisted.  In order to secure its place on the exchange, the company must trade above $1 for 10 consecutive days prior to June 27.   Further bullish news is that Pacific Ethanol just successfully restarted production at their Stockton, Calif., facility, pushing shares sharply higher this week.

 

Technically, the stock looks overextended on the daily chart.  Price has moved above the upper Bollinger Band yesterday when it pushed to take out the $1.20/share recent high range.  It has since pulled back attempting to reenter the Bollinger Band Channel.  Heavy resistance exists at $1.20/share, while support rests at the 20 day Simple Moving Average of 78 cents/share. 

 

Shares dropped more than 10% to $0.96 in today’s morning trade.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.