Alternative Energy Play: Ethanol

Ethanol, that grade school oraganic chemistry compound ethyle alchohol (C2-H5-0H). It was one of the most common compound. Some of my friends even thought of stealing some from lab before they realized that one in lab is not drinkable. So, why I am discussing this in a stock blog. A couple of things have boosted the outlook for the Industry.

1> Last July Congress passed an energy bill that mandates doubling of biofuels ouput by 2012. This January President gave a boost to ethanol manufacturers by giving ethanol and other bio fuels a strong endorsement.
2> Most refiners are phasing out the harmful petrochemical called methyl tertiary butyl ether, or MTBE and will be replacing it with ethanol. MBTE is responsible to complete combustion of gasoline in your engine. This means that consumers get better gas milage and hence lower cost of running their vehicles. This also means less polution as the gasoline burns more cleanly (fully) as well as less gasoline to reach our destination. Ethanol is the replacement of choice.
3> Mckinsey says always have three points :) Many people in midwest are using corn and ethanol to heat their home to reduce high heating bills. I saw some report 3-4 months back that mentioned that it comes 50% cheaper than heating by natural gas. This is and additional demand pressure on the industry.

Coming back to the main demand, the shift from MBTE to Ethanol has taken the industry by surprise and it may be interesting to see how they cope with it. Ethanol can't be transported by pipeline as it is corrosive (Even wondered why you don't get wine in can's;) So, it goes the good old way through ground transport.

I like to invest in industry where there is increase in demand with supply almost at capacity and Ethanol is a good play. Depending on your risk apetite you can choose ADM (Yes our dear big old corn firm) or PEIX( Pacific Ethanol, Inc. -a small Ethanol producer first suggested to me by my friend Murali). But buy it quickly as you want to be onboard this train when the summer fireworks start.

PEIX buy 17.5-18.5 Target 30% increase in 6 months
ADM buy under 35 for a 15-20% pop in 4-6 months