The Failed Promise of Ethanol

Steve Kanaval |

Corn.jpgHard to believe, but shares in Pacific Ethanol (PEIX) were $3500 at one time.

I was recently shocked to learn that despite a 25% pop today after beating upside numbers and trading back through resistance levels at $10, Pacific Ethanol is currently worth less than $300 million total. Keep in mind that PEIX was trading $200 per share five short years ago. Also, remember that in 2006, when the entire world thought ethanol, beets, algae and switchgrass would power all sorts of vehicles with an array of alternative fuels, PEIX was at the top of the heap, and trading the equivalent of $3500 per share with a MarketCap (total value of the company) in the multi-billions. Thus, I was shocked to see it worth under $300M. It is a lesson learned for energy traders and another lesson in expectation and silly valuation.

In 2006, I was covering ethanol and took a trip to cover an up and coming ethanol producer in Iowa, where I watched the entire process from start to finish. What I learned was that ethanol was a huge “still.” They were making moonshine like the Appalachians, and it caused me to take pause. It was also an era when corn was cheap and plentiful - prior to the Food vs. Fuel debate.

Electricity Trumps Corn for Fuel

In 2015, ethanol's image is nothing like the promise of 2006, and electric cars like Tesla Motors, Inc. (TSLA) are highly coveted. Every major auto manufacturer has a similarly high-tech car in the pipeline, ready to roll off the assembly line. The dreams of the past are left in the dust while the valuations of the alternative energy markets have come back to earth. Over the long haul, hope never really replaces execution in equity trading, and stocks can always live in a bloated sector. 

I recall Barnes & Noble, Inc. (BKS) opening 25% higher in 1998 because they launched an E-Commerce site and their prospects were immediately likened to the multiples brought by Amazon.com, Inc. (AMZN) (which happened to sell books), while Jeff Bezos was explaining to any analyst who would listen that they would - one day - be the largest retailer on the planet. The fall of PEIX shows the other side of lofty valuations, and how polarized PEIX is from Amazon. One of the companies executed the plan, the other did not.

It makes me wonder what polarized pair exists today. Will Twitter, Inc. (TWTR) go the way of Betamax when compared to Facebook, Inc. (FB) ? Will Tesla make batteries and not cars, and duplicate Amazon's decoupling from selling books? I have never met a portfolio manager who could see precisely into the future, but I can tell you that what drives all of us who follow markets is the moment we'll find ourselves facing tomorrow morning, when markets open, and the prospect of the next Amazon appearing overshadows the failure of the Pacific Ethanols of the world.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
TSLA Tesla Motors Inc. 181.47 -0.41 -0.23 4,042,324
FB Facebook Inc. 115.40 0.30 0.26 25,070,364
TWTR Twitter Inc. 17.93 -0.10 -0.55 12,208,682
BKS Barnes & Noble Inc. 12.20 -0.20 -1.61 451,640
AMZN Amazon.com Inc. 740.34 -3.31 -0.45 3,561,307
PEIX Pacific Ethanol Inc. 8.70 -0.15 -1.69 612,924

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