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Has The Fear Factor Made Ethanol Stocks A Bargain? (PEIX, AVR, VSE, GPRE)
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Do you hate ethanol? Chances are that you have heard the ethanol hatred. America's ethanol policy is being blamed for the sharp rise in corn prices, which in turn has raised prices for corn feed and therefore prices at the grocery store.
Every day on CNBC, someone says how bad ethanol is. In fact, the other day, famous oil guru T. Boone Pickens called ethanol a "joke" and market commentator Jim Cramer rips the ethanol stocks every chance he gets.
Ethanol stocks, once a mini-bubble sector, have been obliterated. Much of the killing was justified as the input costs from rising corn prices pressured margins. But has the balance between 'fear and greed' been tilted too much on the fear side?
It is a fact that ethanol demand is high, and growth in ethanol consumption is outpacing new supply. In addition ethanol remains significantly cheaper than gasoline in today's market.
When one of the smaller producers, Pacific Ethanol, Inc. (Nasdaq: PEIX), reported much better than expected results on Monday the stock rose 60% that day. The news also put a bid in some of the bigger players like Aventine Renewable Energy Holdings, Inc (NYSE: AVR) and Verasun Energy, Corp. (NYSE: VSE).
Some of the smaller ethanol-related stocks that didn't move much on the PIEX news, includes Green Plains Renewable Energy (Nasdaq: GPRE), MGP Ingredients Inc. (Nasdaq: MGPI), Nova Biosource Fuels, Inc. (AMEX: NBF), Xethanol Corporation (AMEX: XNL), Verenium Corporation (Nasdaq: VRNM).
I think the expectations for ethanol stocks are so low that there may be upside opportunity in some of the stocks. This conviction was cemented the other day when I learned that mega-hedge fund manager Steven Cohen from SAC Capital bought 1.3M shares of beaten-up Aventine Renewable Energy last quarter.
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