Have you ever noticed how the worst time to get into a stock is when the buzz is the loudest, while the best time to sneak into a stock is when nobody's talking about it? Yeah, well, you can add Pacific Ethanol Inc. (NASDAQ:PEIX) to the list of names that's pretty much fooled everyone, then, and now. PEIX was all the rage five years ago, and ended up getting trashed between 2007 and 2008. Despite repeated attempts to get, multiple headaches for the ethanol industry just never let the stock pick itself up. Now, a full year after anybody stopped caring about the stock (bearishly or bullishly), and Pacific Ethanol has quietly doled out a huge 200% gain since November.
What gives, and for that matter, is more of the same in store for PEIX? And perhaps more important, why isn't anyone talking about it? There's an answer to each of those questions.
Beginning with the last question first (Why isn't anyone talking about the massive rally we've seen from Pacific Ethanol Inc. of late?), the reason is.... nobody cares anymore, because nobody has a reason to care.
Right or wrong, most investors are driven by drama, and the ethanol industry has provided plenty of it. The drought from 2012 that put corn in short supply - and put corn at alarmingly high prices - was one source of drama. The federal government's subsidy debate was another cue for speculation. The development of technology and scale that narrowed the parity between gasoline and ethanol two to three years ago also forced the discussion among investors and the media. All of that noise encouraged and entrenched people to take a stand, which creates movement for the stock.... up and down.
But what happens when investors get tired of the rhetoric and lack of closure? Exactly what happened to PEIX shares - nothing. Between late-2012 and late 2013, shares of Pacific Ethanol Inc. stuck right around the $4.00, with no news or no progress or no major change in the price of ethanol (relative to gasoline) to spark any activity.
Nothing lasts forever, though.... not even lulls. It looks like ethanol and ethanol stocks like Pacific Ethanol are a hot button again.
Why is this happening? For starters, the price of ethanol is rising rapidly. As of the last look, it's priced at $2.05 per gallon thanks to a 29% runup since mid-December. It's the biggest advance we've seen since November, and the highest price we've seen since the same time. Unlike the November rally though, this one looks like it's built to last, which segues into the answer to another big question, is more of the same in store for PEIX? Answer: A definite 'probably.'
The price of ethanol is still trapped in the middle of the same love triangle, with government subsidies, the price of corn, and gasoline all pushing and pulling at ethanol prices. But, with 2014's corn yields projected to be high - along with the price of gasoline - the existing subsidies and mandates (despite being under stronger and stronger attacks) are making ethanol more marketable, even at its still-low price. Indeed, the price of ethanol could still rise to the mid-$2's, and still be more cost effective than gasoline. The biggest reason this bullishness from ethanol and of PEIX shares should continue to rise for a while, however, is corn.
Although it's conceivable 2014 could dole out another drought like we saw in 2012, that year was an exception to the norm. The smart bet is on a year of normal weather patterns, which should keep corn costs low, and therefore keep ethanol producers' input prices low. It's a year-long planting-to-harvest process though, so barring any immediate weather catastrophes, odds are that traders and speculators will maintain corn's low prices for several more months before there's even a feeling of real drought-based risk.
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Bottom line? Though shares of Pacific Ethanol Inc. will remain volatile from week to week, we can take the current rally at face value, and expect more of the same through the first two to three quarters of 2014.
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