Playing The Advanced Biofuel Lottery
Over the past six months advanced biofuel producers have raised $450 million in new capital. The industry has finally gained traction after shifting focus from strictly cellulosic ethanol technologies to a mix of biochemical and renewable fuels. Few if any of the advanced biofuel companies ‘climbed up out of the red,’ but we suspect the investors who had a chance to participate in these deals thought they had got a whiff of profits. Indeed, Gevo, Inc. (GEVO: Nasdaq) promised to achieve breakeven at its Luverne, Minnesota plant this year as the ethanol and isobutanol producer was raising capital for renovations and capacity expansion. The stock still languishes below a dollar per share.
If we take the view that so-called smart money participated in these transactions and that the capital infusion will have a catalytic effect on operations, then the public advanced biofuel companies could be strong growth stocks. I looked at each of the public biofuel developers - PEIX, MEIL, GEVO, AMRS, REGI and KIOR - that have raised capital in the last six months to see which one looks like a strong buy.
None of them have earned a dime in profits for shareholders, so we are unable to make a comparison using a valuation metric such as price to earnings or price to cash flow. In terms of price-to-sales, Pacific Ethanol (PEIX: Nasdaq) and Renewable Energy Group (REGI : Nasdaq) are the most interesting, with stocks that trade at 0.40 times sales.
However, a relatively low valuation metric might not be the most compelling factor. A short interest has built up in shares of Kior, Inc. (KIOR : Nasdaq), a developer of cellulosic gasoline and diesel, that is near a quarter of the company’s float. The stock is trades for pennies per share in modest volumes, largely because by all accounts it is on its last leg so to speak. KiOR raised $10 million earlier this year, but still needs more capital to stay in business. Reportedly, management miss a loan payment and long-time investor Vinod Khosla seems to have lost interest. However, a last minute infusion of capital or a sale of the company to a strategic investor would likely drive the stock higher from the current price level.
Amyris, Inc. (AMRS: Nasdaq) has also won the disrespect of short-sellers who are not impressed with the company’s specialty chemicals and biofene business model. Just over a quarter of AMRS has been sold short. Near the end of June AMRS shares formed a so-called ‘low pole warning,’ suggesting the stock could sink lower. However, the stock almost immediately began trading new momentum and traded dramatically higher in the last week, as the company announced the availability of a new loan facility to support development of farnesene technologies. A short-squeeze could change things. I believe a majorty of shares was shorted at prices between $3.50 and $4.20. Thus any development that might push the shares above $4.20 would likely put some fear into the hearts of short-sellers. The stock has tested the $4.20 price level twice in recent weeks and failed both times, so it might be worthwhile to watch AMRS closely.
The only stock left on our short-list of advanced biofuel developers is that of Methes Energies International Ltd. (MEIL: Nasdaq). The company raised $5.0 million in new capital through the sale of common stock in May this year. The shares were sold at $2.00 per share, leaving everyone who participated in the offering under water as the stock has steadily downward ever since the deal was priced. The company has announced a string of accomplishments over the past couple of months and appears to be on the cusp of delivering its first shipments of biodiesel valued t $6.0 million. Investors have not been impressed, but it is possible they are missing an important turn.
In my view, the odds a bit better with any of these stocks than lotto…and a few a priced better than a lottery ticket!
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
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