Small Cap Strategist is published by Crystal Equity Research an independent research resource on small capitalization stocks. Follow along as we discuss the most recent trends in the small-cap sector, investigate interesting companies and pan a few not-so-promising stocks.
introduced in the U.S. Senate has put corn-based ethanol fuel on the chopping
block.The bill’s title says it all –
Corn Ethanol Mandate Elimination Act of 2013.Put into place in 2005, the Renewable Fuel Standard required
refiners and blenders to use 16.6 billion gallons of renewable fuel in 2013, of
which approximately 13 billion gallons will be met through ethanol made from
Support for the legislation is coming from all
quarters.It is not surprising that poultry,
dairy and beef people would think this is a good idea, since corn-ethanol
producers have driven up the price of corn-based feeds.Likewise the oil and gas industry is an
expected supporter. It is surprising to
find environmental and outdoor recreation groups calling for the demise of corn
Widespread support means the legislation is more likely
than not to pass, so it seems like a good time to check on the stocks of public
corn ethanol producers.One would expect
the stocks to trade down on the news.The thing is the stocks prices of most of the corn ethanol producers
were already deeply depressed even before the current legislation was in the
planning stage.That might have
something to do with the fact that conventional as well as cellulosic ethanol
producers alike have largely failed to reach profitability.
The exception is Green Plains Renewable Energy (GPRE:Nasdaq).During the twelve months ending September
2013, the company reported $3.2 billion in revenue from the sale of ethanol,
corn oil, distillers gains and other livestock feed additives.Green Plains turned those sales into $127.9
million in operating cash flow.A cash
conversation rate of 4% might not seem very high, but in the ethanol industry
where most companies are losing money it is impressive.No other public ethanol producer can boast
such success.What is more Green Plains
has a history of profitability and positive cash flow generation.
At the time the mandate elimination bill was introduced
GPRE was trading at 11.1 times trailing earnings.The unfriendly vibe from Washington DC should
have driven the stock down. However, two
weeks later it is trading higher at 12.5 times those same earnings.In the intervening time Standard & Poor
announced it was adding GPRE to the S&P Small-cap 600 Index.Portfolio managers using the S&P 600
Index were required to immediately step into the market and buy shares of GRPE
to bring portfolios in-line with the revised index.
The gap higher in trading last week was just a head fake.
GPRE is not a stock that is ultimately
headed to new highs.At least that is my
view.The corn-ethanol mandate is likely to occupy
discussion in the press for a number of weeks and possibly months.The discussion will not bode well for
valuation of even a highly successful corn-ethanol producer.
A few facts regarding the ownership of GPRE might help in
anticipating how the stock might behave.First, the majority of GPRE shares are held in managed accounts rather
than by individual investors.Professional managers tend to be a bit less susceptible to unfounded
rumor, but once a sell decision is made it can involve sizeable volume. Second,
note that 27% of the float in GPRE had already sold short.The recent gap higher in price might have
washed a few out, but short sellers are likely to circle even closer around
GPRE in the weeks ahead.
Neither the author
of the Small
Cap Strategist web log, Crystal Equity
Research nor its affiliates have a beneficial interest in the companies