You'll Buy It, and You'll Like It!!!

Written by Brian Hicks
Posted April 5, 2006

In September, 1982 I started a very lucrative business within the sterile, fluorescent-lit hallways of Southhampton Middle School.

Every morning on my way to school, I'd stop by the local 7-11 and pick up a few packs of gum that I would later sell at a premium to fellow students. And this wasn't your typical Wrigley's Doublemint either. I'm talking about the good stuff - Bubblicious, Hubba Bubba and Bubble Yum. Loaded with sugar and emulsifiers, these cavity-inducing treasures allowed our local dentist to become a very rich man.

And it certainly increased my bottom line as well!

It was a pretty basic formula. Each individual pack cost $0.25 (tax included). I would buy three packs (15 individual pieces) at a total cost of $0.75. I would then peddle the individual pieces for $0.20 throughout the day. And with my regulars, rarely did I go home without $3.00 in my pocket. That's right, every day I'd bank $2.25 - a net gain of 200%!!!

I did this for months, and built up a pretty sizeable bank account for an 11-year-old kid.

After Christmas break, the price of gum went up to $0.30. Now obviously, I didn't want to part with those types of consistent gains. Sure, I could still come out ahead had I kept the price at $0.20. But let's face it...I was a young, budding capitalist looking for the big payoff. So I upped my price to $0.25 a piece and went for it. The kids kept buying and I kept profiting. Despite higher supply costs - the demand wasn't going anywhere. And I didn't miss a beat.

Of course, back then I was just greedy. My decisions were made without an ounce of research or analysis. Come on...I was 11!!!

Today, however, while following renewable energy markets, my process of analysis is meticulous and borderline obsessive compulsive.

It has to be. Because when it comes to this market, I probably get more e-mails from non-believers than anyone else here at Wealth Daily.

Whether it's from those who got burned during the internet implosion of the 1990s, because they mortgaged their homes to buy shares of anything with a ‘dot-com' on it or those who are so confined by their political affiliations, they can't see beyond the PR smokescreens to make an educated decision that could make them a lot of money - I often find myself bombarded with a million and one reasons as to why renewable energy companies will fail.

Last year it was the threat of the looming silicon shortage within the solar industry. One of my favorite solar plays, Evergreen Solar (ESLR:Nasdaq) is still up over 80% in our portfolio. Sure, it's taken a dip - but I don't see anyone who was smart enough to jump in a year or two ago complaining. Especially considering the fact that Evergeen Solar, as well as most solar companies, is now starting to move advanced technologies (requiring less silicon in the manufacturing process) out of the lab and onto the roofs.

Truth is, even with a silicon shortage - all of our solar plays are way up. And I expect this trend to continue throughout 2006 and beyond.

I expect the same for ethanol too. Even despite the fact that the industry is now being singled out as the main cause of potential gas price increases this summer.

You'll buy it, and you'll like it...

A massive push toward blending ethanol into gasoline is setting off alarms of spiking gas prices this summer. Some are predicting $3.00 a gallon by the end of the month.

And ethanol supplies are being singled out as the culprit.

With a growing number of oil companies expected to blend ethanol instead of MTBE in gas blends now and an already heightened demand, spurred by a 7.5 billion gallon renewable fuel standard for 2012, some are worried that possible shortages will result in higher gas prices.

You see, some states don't have any in-state production of ethanol. That means the renewable fuel has to be transported either from the Midwest or from as far away as Brazil. And that carries a pretty hefty price tag that will certainly be passed along to the consumer.

Yes, the price will go up. But will people stop buying gas because of it?

Not a chance.

They'll begrudgingly pay the $3.00 a gallon, and ethanol producers will continue to run at full capacity while constructing new plants at a record pace.

Want some more?

From a consumer's standpoint...certainly there's an increased level of frustration. But from an investor's standpoint, you have stand back and look at the big picture.

Even if you could validate that every increase in gas this summer is attributable to high ethanol prices - does that justify a bearish outlook on the industry?

If it were to stop consumers from buying gas, then sure, that argument could definitely stand up.

But that's simply not the case. And we all know it.

Now, throw into the mix federal policy makers pushing their own ethanol agendas, individual states trying to secure their own renewable fuel initiatives, to insulate themselves from foreign oil dependency and unstable energy prices, and millions of investment dollars being funneled into these new ethanol plants on a daily basis - and you've got yourself one hell of a momentum that's not going to budge...even with an increase in gas prices.

In fact, much like we saw with solar last year, this industry's so hot it's now spawning a number of new IPOs this year.

Two are just around the corner.

Ethanol producer, VeraSun Energy recently filed to raise $250 million after inking deals in February with General Motors and Ford to install ethanol fuel pumps in the Midwest.

VeraSun, which lists itself as the second-largest ethanol producer in the U.S. operates two plants in South Dakota and Iowa, and is building a new facility in Iowa as well.

The company plans to trade under the symbol, VSE on the New York Stock Exchange.

And Aventine Renewable Energy Holdings, Inc. - operating ethanol plants in Illinois and Nebraska plans to raise up to $50 million on its IPO, which will trade on the New York Stock Exchange as well, under the symbol AVR.

You can't stop this thing!

I suspect that while domestic ethanol producers will eventually be able to meet the demand, there is going to be a transitional period where imports will still be necessary. But this isn't necessarily a bad thing - again...from an investor's perspective.

This added pressure on conventional, domestic ethanol plants is already providing a catalyst for the next evolution of ethanol production. And that means we have another ethanol opportunity brewing.

Now, in an effort to rely less on ethanol coming from the Midwest, a number of states outside the cornbelt are looking into the construction of their own smaller, regional production facilities. Of course, not every state has an abundance of corn. But every state does have access to another feedstock that can be turned into cellulosic bioethanol. Whether its woodchips, agricultural waste or even old newspapers, cellulosic bioethanol plants maintain the next evolution of ethanol production. And the companies that succeed in not only producing the stuff, but producing it regionally, both within and outside the Midwest will offer investors a lesser-known, but just as profitable sector to tap.

Whether coerced by fears of oil dependency, the promise of sustainability or the massive federal and state push, the ethanol industry will continue to gain strength. And savvy energy investors are going to ride this like Gary Cooper into the sunset.

In fact, our Green Trader position in one of these cellulosic bioethanol companies is up over 80% since February 23.

For more on ethanol momentum and cellulosic bioethanol, you can visit our free ‘archives' section at Green Chip Stocks.

Until next time...

- Jeff Siegel

Managing Editor, Green Chip Stocks