While many of us may think that ethanol companies are not a reliable investment, Barron's asks us to reconsider our thoughts, pointing out to a bright futures for those stocks. People's worries about ethanol companies came as a result of soaring crude oil prices. Thus, the general tendency was to use corn-based alcohol as a substitute for gasoline. The negative reaction was an immediate consequence, and a top official of the United Nations has named ethanol as a "crime against a great part of humanity" as it lead to higher food costs.
Barron's points out three ethanol producers, VeraSun Energy Corp. (NYSE: VSE), Aventine Renewable Energy (NYSE: AVR), and Pacific Ethanol Inc. (NASDAQ: PEIX), which faced difficult time over the past year, although they saw a nice rebound recently after reporting first-quarter operating profits, and Congress passed a farm bill.
Looking ahead, the companies showed optimism related to their further production based on projected 2009 capacity. This takes into account the completion of plants under construction when talking about Aventine and VeraSun. Thus, VeraSun has a projected production of 1.6 billion gallons, Aventine came with 433 million, while Pacific Ethanol has a projected production of 220 million.
Today started out as a good day, but traders went back to "do the opposite of what feels good." The Conference Board showed that April's leading economic indicators were +0.1%. Oil also stayed above $127 per barrel.
Here are the unofficial closing prices for US index levels:
Amazon.com (NASDAQ: AMZN) saw a sharp rise with shares up over 7% at $82.22 late in the day after Goldman Sachs added it to the CONVICTION BUY LIST.
Campbell's Soup (NYSE: CPB) saw a 5% drop by the end of the day to $34.06 after a disappointing result.
Lowe's Companies (NYSE: LOW) saw a 2.5% drop to $24.25 by the end of the day after the company's earnings came in line but guidance was weak.
Pacific Ethanol Inc. (NASDAQ: PEIX) saw shares rise an unbelievable 49% with shares at $4.78 late in the day after the battered ethanol producer beat earnings expectations.
SanDisk Corp. (NASDAQ: SNDK) was down over 8% at $29.74 in the final minutes today after making cautious comments at a JPMorgan investor conference.
Jon Ogg produces and edits the "10 Stocks Under $10" newsletter and he does not own securities in the companies he covers.
The earnings party of last week was full of fun and frolic. For the most part, if you followed my list of recommendations, you would have had your very own "Fiesta de Finance." (See Week in Preview – May 5)
The earnings season is still in full swing and should provide a great deal of action for the companies that will be reporting. But these companies will have to fight through a few new economic barriers. With oil pushing past historic levels and questions beginning to surface concerning the ability of the investor to continue to support a market that has so many headwinds, the mood is likely to shift moving forward. It is time for discipline, short and simple. Now, more than ever investors need a plan. I cover this strategy in my book, The Disciplined Investor.
In the last installment of The Week in Preview, I was looking for party opportunities in honor of Cinco de Mayo. This week, Misery is the theme. That is the only word that comes to mind with oil at a level that you would have never expected, a massive and unrelenting credit and housing crisis and a banking system that is defunct.
Monday - May 12
We start the week with a report from IndyMac Bancorp (NYSE: IMB). This bank is smack in the middle of the housing problem. It is primarily a lending company that facilitates loans for single-family homes. It's also involved in the origination and trading of mortgages. How does that sound to you as an investment? Shares have slid from $23 in October 2007 to an unbelievable level of $3.50 recently. Ouch... If you are a shareholder still holding on with hope and a prayer for something...anything, keep on dreaming. The good news is that the stock is sporting a yield of 29%. But, if you think that yield is going to be maintained, I have a bridge for sale. Estimates are for a loss of $1.92 per share for the quarter.
UBS initiated Interpublic Group (NYSE: IPG) and Omnicom Group (NYSE:OMC) with Buy ratings and an $11 target and $62 target, respectively. The firm views valuation as attractive.
Pacific Ethanol (NASDAQ: PEIX) has announced the completion of a $40 million equity investment by Lyles United, LLC. The investment included 2,051,282 shares of class B stock convertible to 6,153,846 shares of common stock and a warrant to purchase another 3,076,923 shares of common stock at $7.00 per share. The original Securities Purchase Agreement was dated March 18, 2008.
Normally we do not cover such small financings, nor do we cover financing being completed from part of a prior pact. Ethanol stocks in the U.S. have been in trouble, and Pacific Ethanol is no exception as shares have traded north of $17.00 over the last year.
If any company needed the funding in the ethanol sector, it was Pacific Ethanol. Gone are the days that Bill Gates owned a large portion of the company, and gone are the days that everyone believes that the current method of domestic ethanol will act to help the energy issues today if subsidies didn't exist.
Pacific Ethanol (NASDAQ: PEIX), the largest West Coast-based marketer and producer of ethanol, closed at $4.64 on Tuesday. Goldman Sachs said on November 27: "We are adding PEIX to the Americas Sell List, as we believe that ethanol equities will continue to lag the energy sector and broader stock market." PEIX overall option implied volatility of 75 is above its 26-week average of 50 according to Track Data, suggesting larger price risks.
VeraSun Energy (NYSE: VSE) operates as an ethanol producer. VSE closed at $10.14 on Tuesday. Friedman Billings says: "Sources tell us House staff hope to complete draft energy legislation today with hopes of a Floor vote next week. Proposed RFS increases exceed existing expectations for near-year corn ethanol legislative demand increases." VSE overall option implied volatility of 64 is above its 26-week average of 53 according to Track Data, suggesting larger price fluctuations.
Aventine Renewable Energy (NYSE: AVR) a producer, marketer and end-to-end distributor of ethanol. Corn futures are down 0.56% to 398.50 and WTI Crude futures are at 94.48 according to Bloomberg. AVR overall option implied volatility of 75 is above its 26-week average of 57 according to Track Data, suggesting larger price risks.
Daily Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Citigroup Incorporated (NYSE: C) recently received an unexpected call from a "prominent investment banker" inquiring about a merger with Bank of America Corporation (NYSE: BAC); it was rejected outright, and Citi instead turned to the Abu Dhabi Investment Authority, a part of the Abu Dhabi government, for a $7.5B cash infusion, the Wall Street Journal reported.
As ethanol demands forced up food prices, and with questions about its capacity to be a significant oil substitute, demand has slowed, according to the Wall Street Journal, which doesn't help the prospects of newly public companies such as VeraSun Energy Corporation (NYSE: VSE) and Pacific Ethanol Inc (NASDAQ: PEIX).
The Financial Times reported that the SRM hedge fund increased its stake in British bank Northern Rock to 8.5% yesterday, probably in order to block Virgin Group from taking over the lender. SRM and RAB Capital, with a combined stake in Northern Rock of more than 15%, are backing a rival bid for the bank by British private equity fund Oilvant.
OTHER PAPERS:
A federal agency has subpoenaed Countrywide Financial Corporation (NYSE: CFC), in an attempt to determine whether the company abused the bankruptcy system in two Florida foreclosure cases, according to the New York Times.
WEB SITES:
MarketWatch's Herb Greenberg believes Lululemon Athletica Inc (NASDAQ: LULU) CEO Bob Meers may have "exaggerated a bit" about his job history. While it's true Mr. Meers was employed by Reebok International, he was not president and CEO of the brand for the length of time he stated, nor was he the president of the Rockport shoe and Greg Norman brands.
MOST NOTEWORTHY: BAE Systems, VASCO Data Security, Salesforce.com, Tempur Pedic and Fidelity National were today's noteworthy upgrades:
Goldman added BAE Systems (OTC: BAESY) to its Conviction Buy List, as they believe the company's defensive growth characteristics will lead to outperformance.
Salesforce.com Inc (NYSE: CRM) was upgraded to Outperform from Market Perform at Piper to reflect the company's strong cash flow generation and the firm's belief that CRM is a core holding in the enterprise application market.
Citigroup upgraded shares of Tempur Pedic International Inc (NYSE: TPX) to Buy from Hold, as they believe double-digit sales growth and margin expansion will drive 25% EPS growth over the next few years.
Not so long ago, ethanol was all the rage, and stocks like Pacific Ethanol (NASDAQ: PEIX) were soaring. So about a year ago, I called in on Jim Cramer's Mad Money and asked when the ethanol bull market would be over -- he pronounced it dead on that show, and it was a good call.
According to The Wall Street Journal, the true driver of the ethanol boom could be in jeopardy [subscription]. As more and more corn gets used for ethanol, consumers are seeing a surge in the price of food. With ethanol production approaching the Congressionally mandated quota, the growth could be over unless Congress decides to make another push for it.
Anyone investing in, or thinking about investing in, ethanol stocks should do so with the awareness that it's an industry that exists largely because of government subsidies -- it's a speculative political play as much as anything else.
And it looks like the political tide could be turning against ethanol.
MOST NOTEWORTHY: The ethanol sector, BT Group, AMR Corp and Kyphon were today's noteworthy downgrades:
Friedman Billings downgraded Aventine Renewable Energy (NYSE: AVR) and Pacific Ethanol Inc (NASDAQ: PEIX) to Underperform and VeraSun Energy Corporation (NYSE: VSE) was downgraded to Market Perform from Outperform. The firm said the ethanol market has become increasingly challenging as spot market prices have declined by 30% in the past few months and expect pressure to remain through 2008 as the industry's growing pains continue.
Morgan Stanley downgraded shares of BT Group (NYSE: BT) to Underweight from Equal Weight on valuation and regulation uncertainty ahead of Ofcom's first consultation document next week.
AMR Corporation (NYSE: AMR) was downgraded to Sell from Neutral at Goldman to reflect the company's U.S. exposure as they expect the U.S. economy to slow.
Banc of America downgraded shares of Kyphon Inc (NASDAQ: KYPH) to Neutral from Buy on valuation as the spread on the acquisition by Medtronic Inc (NYSE: MDT) has now narrowed.
Despite a seemingly unanimous support for environmental matters from the Democratic party, there are still divisions inside the party on how to go forward. According to a Wall Street Journal article [subscription required], the sharpest inter-party divisions exist on the issue of fuel-economy standards.
Interestingly, it seems like everyone in the party agrees fuel-economy standards need to be increased, the issue is when and how fast. Automakers, especially U.S.-based, would stand to suffer if fuel-economy standards are quickly increased for obvious reasons such as making it more costly to produce cars -- a factor that American automakers would probably prefer not to deal with in their current situations.
Fuel-economy standards are certainly not the only issue at hand. Last week, House speaker Nancy Pelosi agreed to mandating utilities to begin using more renewable fuels. And like I covered in this post, I think the ethanol mandate is going to be increased in the next environmental bill.
All this being said, I think the most interesting way to play the environmental boom in America is through a basket of stocks. One specific stock I like for the environmental bill is Pacific Ethanol Inc (NASDAQ: PEIX), a thesis I covered here.
If you don't have time to do research on all the different companies in this interesting sector, I really like the Powershares Clean Energy ETF (AMEX: PBW). This is basically an index of clean companies which serves to reduce the risks in entering this volatile and speculative sector. Although the expense ratio is rather high at .60%, it's the best option for investors not willing to spend too much time on this sector.
Remember that no politician in their right mind could try and jump in front of the pro-ethanol train. In doing so, they would risk losing the agricultural lobby, angering his constituents, and even being "less environmentally concerned" than the mighty George W. Bush. As a result of these factors, I'm going to leave the anti-ethanol arguments aside from here on and focus on how to profit from the seemingly imminent increase in the United States ethanol mandate. The pure-play on this is Pacific Ethanol (NASDAQ: PEIX).
Pacific Ethanol has certainly had its fair share of excitement. About a year and half ago, the ethanol frenzy was full-on and the stock quickly moved from $10 per share to $45 per share. However, like many irrational, bubble-like trading patterns, this move was proceeded by a fall back to the $12-20 range, a range the stock has been "stuck" in for the last year.
However, I think that an increase in the ethanol mandate is enough to send the stock out of its range, or at least to the top of its range. Due to the stock's significant short position at about 18% of the float, any piece of good news probably will cause a short squeeze, forcing shorts to cover their positions and run for the hills. When short squeezes occur, speculators tend to also buy the stock, thus forcing even more volatility upon the stock.
MOST NOTEWORTHY: Ethanol producers Novacea, Inc. (NOVC) and Aimco (AIV) were today's noteworthy downgrades:
Banc of America downgraded shares of Andersons Inc. (NASDAQ: ANDE) to Neutral from Buy, as well as VeraSun Energy (NYSE: VSE), Pacific Ethanol (NASDAQ: PEIX) and Aventine Renewable Energy (NYSE: AVR) to Sell from Neutral. The firm believes new ethanol supply will depress ethanol's premium to gasoline, drive corn prices higher and pressure distillers' grains values.
Novacea Inc. (NASDAQ: NOVC) was downgraded to Peer Perform from Outperform at Bear Stearns based on valuation and lack of catalysts until 2H08; the firm believes the company's deal with Schering-Plough (NYSE: SGP) is a positive.
Aimco Properties (NYSE: AIV) was downgraded to Underweight from Equal Weight at Lehman, as the firm does not view AIV as an attractive takeover target.
OTHER UPGRADES:
EMC Corp. (NYSE: EMC) was downgraded to Peer Perform from Outperform at Bear Stearns based on valuation.
MOST NOTEWORTHY: Today's noteworthy upgrades include Papa John's Int'l, Inc (PZZA), ExpressJet Holdings, Inc (XJT), Nvidia Corp (NVDA),Georgia Gulf Corp (GGC) and MasterCard (MA):
Following Q1 results, Oppenheimer upgraded shares of Papa John's Int'l, Inc (NASDAQ: PZZA) to Buy from Neutral, citing better-than-expected revenue growth, improved margins and acquisitions.
Soleil upgraded shares of ExpressJet Holdings (NYSE: XJT) to Hold from Sell with a $7 target due to the likely absence of any real news until at least August.
Deutsche Bank assumed shares of Nvidia (NASDAQ: NVDA) with a Buy, up from Hold, as the firm believes Vista will accelerate NVDA's growth rates making their 2008 estimates conservative.
Citigroup upgraded shares of Georgia Gulf Corp (NYSE: GGC) to Buy from Sell based on an improved near-term outlook.
MasterCard (NYSE: MA) was upgraded to Hold from Sell at Stifel based on the lenders impressive Q1 results and pricing power...
On today's STOP TRADING segment on CNBC, Jim Cramer talked about some of his ethanol plays. As far as the crop report, Cramer thinks they aren't focusing on the secular trends. He likes these regardless of the crop acreage report:
He said NO on the pure plays like Pacific Ethanol (NASDAQ: PEIX) or the Andersons Inc. (NYSE: ANDE) because you can buy best-of-breed names. On oil Cramer addressed the Iran issue, and the Oil Stocks are acting like there will be a resolution to Iran very soon. The stocks are telling you that there will be a breakthrough this weekend and that is why they are down.
Cramer brought up Take-Two Interactive Software (NYSE: TTWO) and said that GTA may get them out of the hole, but that is still a problem-stock with uncertainty. QUALCOMM Inc. (NYSE: QCOM) is a persistent stock. Cramer noted the company has already signaled a good quarter, but he said it is up on window dressing and right now it's a "Don't Buy" until it comes in.
While many of us may think that ethanol companies are not a reliable investment, Barron's asks us to reconsider our thoughts, pointing out to a bright futures for those stocks. People's worries about ethanol companies came as a result of soaring crude oil prices. Thus, the general tendency was to use corn-based alcohol as a substitute for gasoline. The negative reaction was an immediate consequence, and a top official of the United Nations has named ethanol as a "crime against a great part of humanity" as it lead to higher food costs.
The earnings party of last week was full of fun and frolic. For the most part, if you followed my list of recommendations, you would have had your very own "Fiesta de Finance." (.gif){kind=logo}
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