Pacific Ethanol (PEIX) & BioFuel Energy Corp. (BIOF) are Poised to Surprise
By James E. Brumley
Published: January 13, 2012 8:19:52 AM PST
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Rating StockHQ:PEIX$1.16 -$0.01 -0.70%BIOF$0.64 +$0.00 +0.03%
Never let it be said the market still doesn't serve up surprises. If there was ever a time ethanol stocks like Pacific Ethanol Inc. (NASDAQ:PEIX) and BioFuel Energy Corp. (NASDAQ:BIOF) should be under fire, it's now. With the government ethanol subsidy now 13 days into non-existence, ethanol producers were supposed to be closing shop. Instead, investors continue to wade into - though not plow into - BIOF and PEIX. Both are up for the week, and both are renewing uptrends that began back in October when (ironically) it became pretty clear the Federal government was not going to renew the subsidy that got the industry off the ground.
For BioFuel Energy Corp., that means a push back above all of its key moving averages, and another higher low. BIOF has yet to make another higher high. Instead, it's formed a wedge shape (to of them, actually) that's coming to a point. Now at the tip of the triangle, the bulls - or the bears - are going to have to make a decision. Make no mistake though... the tide and the rising 100-day moving average line (gray) say the bulls have the edge.
As for Pacific Ethanol Inc., it's following in the same footsteps as BIOF... only it would probably be considered more technically sound as a breakout candidate by most traders. PEIX didn't soar out of control in November, skewing the charts to a point where its upper limit was unclear.
And simultaneously, Pacific Ethanol shares have done a better job at turning key moving average lines like the 50-day line into a floor; the stock hasn't trades under since November, though it's been tested as support twice since then.
The end result is a tighter wedge shape, and though PEIX still needs to make its way above the upper edge of the wedge as well as above the 200-day line (green) at $1.24 to be considered a true breakout stock, it's still got more upside potential BioFuel Energy Corp.
Yet, there's another X-factor coming into play now... a factor that should have mattered in November and December, but didn't because both stocks were trading more on speculation than on data. That factor is the price of ethanol, which is the key driving force behind whether or not Pacific Ethanol Inc. and BioFuel Energy Corp. are fiscally viable. As it turns out, the end of the subsidy era may not mean the end of ethanol companies after all.
Ethanol prices soared from $2.38 per gallon at the beginning of 2011 to a peak of $3.07 in July, partially on the heels of higher oil/gas prices, and partially on the assumption that the key subsidy would be renewed. Though ethanol prices started to fad in August, they were still high enough to lead Pacific Ethanol to record-breaking earnings of $0.12 per share in Q3. BioFuel Energy didn't do too bad either in the third quarter of last year, swinging to a profit of $0.02 per share (also a record). It was the first time either company had meaningfully been in the black.
Don't look for a repeat with Q4's numbers though. Realizing late in the year that the subsidy was not going to be renewed for 2012, ethanol prices plunged to a low of $2.06 per gallon by the middle of December on worries that the industry couldn't survive.
The market - stock market - knew better though, because as the price of ethanol was plummeting, shares of PEIX and BIOF were just starting to heat up. Perhaps POET POET (the world's largest ethanol producer) CEO Jeff Broin was right when he opined that the industry didn't need the subsidy to survive. Perhaps he realized what most are overlooking - that even without the subsidy, the government's ethanol usage mandates still apply.
The real litmus test, however, is still the going price of ethanol... and that's where things get really interesting.
Though still nowhere near the peak of $3.06 from July, ethanol prices have improved from a low of $2.06 a month ago to a decent $2.30 per gallon. Ideally, ethanol producers would like to see something in the range of $2.50 or more to have a shot at reproducing third quarter's profits, so even Q1's numbers may not like all that great Pacific Ethanol or Biofuel Energy. The price is pointed in a positive direction again though, and could get there fairly soon.
In the meantime, it's still clear that BIOF and PEIX are just itching to find a reason - any reason - to start the hottest part of their budding breakout efforts. Keep 'em close.
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