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PEIX Drops Below $2

Wow! I just checked a few stocks that I tend to watch, and Pacific Ethanol (PEIX) has now fallen to $1.85 a share. It is now down more than 95% off its high, and down more than 90% from the first time I warned that the company was overvalued. Once boasting a market cap of almost $2 billion, that has now fallen to $82 million.

Now, where are all of those posters who kept telling me what a deal this was after it fell to $10? Like our friend James, who cited PEIX investor Bill Gates’ “ability to see into the future” as a reason to invest in PEIX, and told me I was “very, very stupid” if I thought the price would continue to fall. Of course Gates has recently been dumping his shares as quickly as he can (at a huge loss). Personally, as I have said before, if I want some insights into the future of computing, I would listen to Gates. On the topic of Pacific Ethanol, or for that matter any topic far-removed from his area of expertise, not so much.

June 24, 2008 Posted by | Bill Gates, ethanol, ethanol prices, investing, Pacific Ethanol, PEIX | 21 Comments

Pacific Ethanol Continues Slide

In June 2006, I warned about Pacific Ethanol (PEIX) in response to a story suggesting that the company presented a great investment opportunity:

Ethanol Investing: Counterpoint

Some excerpts of what I wrote:

I will make the case that many claims regarding ethanol are overblown, and some are simply fiction. I will also take a look at Pacific Ethanol to show why I think the underlying fundamentals make it a very risky investment.

Local grain supplies, preferably within 50 miles of the plant, are important for keeping costs down. It will probably be cheaper for a producer to produce ethanol in the Corn Belt, and then ship the ethanol to California than it would be to ship the corn there and produce it locally. There is a reason that California is not a hotbed of ethanol activity, despite the fact that Californians consume ethanol. It’s too far from the corn, so it is more cost effective to ship in finished ethanol.

This is not high tech, but this is how companies like PEIX are being valued. It is simply too easy to get into this business, and success is highly dependent on continued government mandates. Maybe someday cellulosic ethanol – the much touted next generation of ethanol technology – will warrant these kinds of valuations. I have great hope for cellulosic ethanol, and believe it can eventually make a contribution. But for now, I don’t think the underlying fundamentals warrant the valuations placed on grain ethanol producers – especially those far from corn supplies.

On the date that article was published, PEIX closed at $22.54. I wrote an update three months later after the price had fallen 38%. Yesterday, PEIX released earnings, and their stock fell to $6.89 – down 69% from the first article I wrote warning that PEIX was overpriced. Some excerpts from a story on their earnings:

NEW YORK (Associated Press) – Pacific Ethanol Inc. swung to a loss in the third quarter due to inventory write-downs as the price of ethanol fell dramatically, the company said Friday.

The ethanol producer posted a loss of $5.9 million, or 15 cents per share, versus profit of $2.7 million, or 7 cents per share, a year earlier.

Ethanol prices have fallen as supplies expanded faster than demand. At the same time, prices for ethanol’s main feedstock, corn, rose dramatically, further hurting profit margins.

Pacific Ethanol shares dropped to a new low of $7.13, down 69 cents of 8.8 percent, in morning trading.

Of course people continue to think that these are buying opportunities, and they keep losing money. Like this guy, who responded to an article I wrote about Bill Gates’ PEIX investment. For him, it was a buying opportunity. Of course share prices have fallen another 20% since then.

November 10, 2007 Posted by | Bill Gates, investing, Pacific Ethanol | 3 Comments

Bill Gates’ Ethanol Losses

About the same time I was warning last year of an ethanol bubble, Bill Gates was sinking money into Pacific Ethanol (PEIX). In the same essay in which I warned of the bubble, I took a look at Pacific Ethanol, and concluded that the underlying fundamentals of the stock – even with the ethanol mandate – were not good.

Since that time, Pacific Ethanol has fallen from $22.54 down to today’s value of $9.97. Given that Gates’ purchase price was $16.00 a share – and the stock ran up to ultimately around $40 before collapsing – it looked like a shrewd move for a while. And I lost count of how many people – when arguing with me about ethanol – pointed out that Bill Gates and Vinod Khosla were investing in it, and that was good enough for them. After all, who did I think I was to contradict a couple of billionaires on their vision of the future? (Of course, one billionaire – Mark Cuban – did listen).

But the fundamentals were not there. I believe that Gates finds himself in this position – and I don’t believe he has seen the last of his (long-term) losses in this stock – because he had to rely on others to give him direction in his case. He was outside his area of expertise. And while people seem to automatically assume that Bill Gates’ genius in the computer industry somehow translates across other industries, this is not the case. I have said the same about Vinod Khosla – expertise in one area does not transfer to a completely different industry, so you better take his ethanol claims with a very large dose of salt. I believe that he will ultimately lose out in a very big way with his ethanol investments. He may sell into some hype and make a bit of money now, but if he stays in for the long haul he will not fare very well.

Continuing on this theme, today several ethanol stocks, including Pacific Ethanol, were downgraded by a major brokerage firm:

Ahead of the Bell: Ethanol Downgraded

NEW YORK (Associated Press) – A Friedman Billings Ramsey analyst downgraded three ethanol producers Thursday, slashing his price targets and predicting the industry’s “growing pains” will continue due to small profit margins and oversupply.

Ethanol production margins have dropped to 15 cents per gallon from 75 cents in mid-May, said Eitan Bernstein, as the price of ethanol has dropped. He said prices will stay low through 2008, and reduced his ethanol price estimates for 2007 to 2010.

Bernstein cut his rating on Aventine Renewable Energy Holdings Inc. to “Underperform” from “Outperform,” reducing his price target to $9 per share from $24. The stock closed at $11.68 Wednesday. He downgraded VeraSun Energy Corp. stock to “Market Perform” from “Outperform,” halving his price target to $12 from $24. The stock finished at $12.02 on Wednesday, and was unchanged in premarket trading. The analyst now rates shares of Pacific Ethanol Inc. “Underperform,” down from “Market Perform.” He cut his price target to $8 from $15. Shares ended Wednesday trading at $11.17.

Bernstein’s downgrades come a day after Aventine President and Chief Executive Ronald Miller addressed investors at a Bank of America conference. Miller said the industry is in a very difficult time due to declining margins, and expects conditions to stay hard until 2009.

Shouldn’t that downgrade have come before the stock price crashed? Of course if you have read this blog for long, you know that I have been warning about this for a long time. Here was a warning I gave 6 months ago:

When a commodity has such incredibly low barriers to entry, it is only a matter of time before capacity is overbuilt and the price crashes. That’s why I expect ethanol producers to continue lobbying congress to increase the amount of mandated ethanol usage and to accelerate the timeline. Otherwise, a lot of ethanol producers will struggle to stay in business in the next few years as their increased demand for corn continues to increase the price, while all the new ethanol capacity is flooding the market. Profit margins will evaporate (although corn farmers should earn a windfall). What we may see is a bail out reminiscent of the Savings and Loan debacle of the 1980’s.

Looks like Wall Street is finally coming around, although a bit too late for many investors. It may not matter much in the end to a billionaire, but it will to the people who tried to emulate them by following their investment strategy.

September 21, 2007 Posted by | Bill Gates, ethanol, ethanol prices, investing, Vinod Khosla | Comments Off on Bill Gates’ Ethanol Losses

Bill Gates’ Ethanol Losses

About the same time I was warning last year of an ethanol bubble, Bill Gates was sinking money into Pacific Ethanol (PEIX). In the same essay in which I warned of the bubble, I took a look at Pacific Ethanol, and concluded that the underlying fundamentals of the stock – even with the ethanol mandate – were not good.

Since that time, Pacific Ethanol has fallen from $22.54 down to today’s value of $9.97. Given that Gates’ purchase price was $16.00 a share – and the stock ran up to ultimately around $40 before collapsing – it looked like a shrewd move for a while. And I lost count of how many people – when arguing with me about ethanol – pointed out that Bill Gates and Vinod Khosla were investing in it, and that was good enough for them. After all, who did I think I was to contradict a couple of billionaires on their vision of the future? (Of course, one billionaire – Mark Cuban – did listen).

But the fundamentals were not there. I believe that Gates finds himself in this position – and I don’t believe he has seen the last of his (long-term) losses in this stock – because he had to rely on others to give him direction in his case. He was outside his area of expertise. And while people seem to automatically assume that Bill Gates’ genius in the computer industry somehow translates across other industries, this is not the case. I have said the same about Vinod Khosla – expertise in one area does not transfer to a completely different industry, so you better take his ethanol claims with a very large dose of salt. I believe that he will ultimately lose out in a very big way with his ethanol investments. He may sell into some hype and make a bit of money now, but if he stays in for the long haul he will not fare very well.

Continuing on this theme, today several ethanol stocks, including Pacific Ethanol, were downgraded by a major brokerage firm:

Ahead of the Bell: Ethanol Downgraded

NEW YORK (Associated Press) – A Friedman Billings Ramsey analyst downgraded three ethanol producers Thursday, slashing his price targets and predicting the industry’s “growing pains” will continue due to small profit margins and oversupply.

Ethanol production margins have dropped to 15 cents per gallon from 75 cents in mid-May, said Eitan Bernstein, as the price of ethanol has dropped. He said prices will stay low through 2008, and reduced his ethanol price estimates for 2007 to 2010.

Bernstein cut his rating on Aventine Renewable Energy Holdings Inc. to “Underperform” from “Outperform,” reducing his price target to $9 per share from $24. The stock closed at $11.68 Wednesday. He downgraded VeraSun Energy Corp. stock to “Market Perform” from “Outperform,” halving his price target to $12 from $24. The stock finished at $12.02 on Wednesday, and was unchanged in premarket trading. The analyst now rates shares of Pacific Ethanol Inc. “Underperform,” down from “Market Perform.” He cut his price target to $8 from $15. Shares ended Wednesday trading at $11.17.

Bernstein’s downgrades come a day after Aventine President and Chief Executive Ronald Miller addressed investors at a Bank of America conference. Miller said the industry is in a very difficult time due to declining margins, and expects conditions to stay hard until 2009.

Shouldn’t that downgrade have come before the stock price crashed? Of course if you have read this blog for long, you know that I have been warning about this for a long time. Here was a warning I gave 6 months ago:

When a commodity has such incredibly low barriers to entry, it is only a matter of time before capacity is overbuilt and the price crashes. That’s why I expect ethanol producers to continue lobbying congress to increase the amount of mandated ethanol usage and to accelerate the timeline. Otherwise, a lot of ethanol producers will struggle to stay in business in the next few years as their increased demand for corn continues to increase the price, while all the new ethanol capacity is flooding the market. Profit margins will evaporate (although corn farmers should earn a windfall). What we may see is a bail out reminiscent of the Savings and Loan debacle of the 1980’s.

Looks like Wall Street is finally coming around, although a bit too late for many investors. It may not matter much in the end to a billionaire, but it will to the people who tried to emulate them by following their investment strategy.

September 21, 2007 Posted by | Bill Gates, ethanol, ethanol prices, investing, Vinod Khosla | 14 Comments

Bill Gates’ Ethanol Losses

About the same time I was warning last year of an ethanol bubble, Bill Gates was sinking money into Pacific Ethanol (PEIX). In the same essay in which I warned of the bubble, I took a look at Pacific Ethanol, and concluded that the underlying fundamentals of the stock – even with the ethanol mandate – were not good.

Since that time, Pacific Ethanol has fallen from $22.54 down to today’s value of $9.97. Given that Gates’ purchase price was $16.00 a share – and the stock ran up to ultimately around $40 before collapsing – it looked like a shrewd move for a while. And I lost count of how many people – when arguing with me about ethanol – pointed out that Bill Gates and Vinod Khosla were investing in it, and that was good enough for them. After all, who did I think I was to contradict a couple of billionaires on their vision of the future? (Of course, one billionaire – Mark Cuban – did listen).

But the fundamentals were not there. I believe that Gates finds himself in this position – and I don’t believe he has seen the last of his (long-term) losses in this stock – because he had to rely on others to give him direction in his case. He was outside his area of expertise. And while people seem to automatically assume that Bill Gates’ genius in the computer industry somehow translates across other industries, this is not the case. I have said the same about Vinod Khosla – expertise in one area does not transfer to a completely different industry, so you better take his ethanol claims with a very large dose of salt. I believe that he will ultimately lose out in a very big way with his ethanol investments. He may sell into some hype and make a bit of money now, but if he stays in for the long haul he will not fare very well.

Continuing on this theme, today several ethanol stocks, including Pacific Ethanol, were downgraded by a major brokerage firm:

Ahead of the Bell: Ethanol Downgraded

NEW YORK (Associated Press) – A Friedman Billings Ramsey analyst downgraded three ethanol producers Thursday, slashing his price targets and predicting the industry’s “growing pains” will continue due to small profit margins and oversupply.

Ethanol production margins have dropped to 15 cents per gallon from 75 cents in mid-May, said Eitan Bernstein, as the price of ethanol has dropped. He said prices will stay low through 2008, and reduced his ethanol price estimates for 2007 to 2010.

Bernstein cut his rating on Aventine Renewable Energy Holdings Inc. to “Underperform” from “Outperform,” reducing his price target to $9 per share from $24. The stock closed at $11.68 Wednesday. He downgraded VeraSun Energy Corp. stock to “Market Perform” from “Outperform,” halving his price target to $12 from $24. The stock finished at $12.02 on Wednesday, and was unchanged in premarket trading. The analyst now rates shares of Pacific Ethanol Inc. “Underperform,” down from “Market Perform.” He cut his price target to $8 from $15. Shares ended Wednesday trading at $11.17.

Bernstein’s downgrades come a day after Aventine President and Chief Executive Ronald Miller addressed investors at a Bank of America conference. Miller said the industry is in a very difficult time due to declining margins, and expects conditions to stay hard until 2009.

Shouldn’t that downgrade have come before the stock price crashed? Of course if you have read this blog for long, you know that I have been warning about this for a long time. Here was a warning I gave 6 months ago:

When a commodity has such incredibly low barriers to entry, it is only a matter of time before capacity is overbuilt and the price crashes. That’s why I expect ethanol producers to continue lobbying congress to increase the amount of mandated ethanol usage and to accelerate the timeline. Otherwise, a lot of ethanol producers will struggle to stay in business in the next few years as their increased demand for corn continues to increase the price, while all the new ethanol capacity is flooding the market. Profit margins will evaporate (although corn farmers should earn a windfall). What we may see is a bail out reminiscent of the Savings and Loan debacle of the 1980’s.

Looks like Wall Street is finally coming around, although a bit too late for many investors. It may not matter much in the end to a billionaire, but it will to the people who tried to emulate them by following their investment strategy.

September 21, 2007 Posted by | Bill Gates, ethanol, ethanol prices, investing, Vinod Khosla | Comments Off on Bill Gates’ Ethanol Losses

Bill Gates’ Ethanol Losses

About the same time I was warning last year of an ethanol bubble, Bill Gates was sinking money into Pacific Ethanol (PEIX). In the same essay in which I warned of the bubble, I took a look at Pacific Ethanol, and concluded that the underlying fundamentals of the stock – even with the ethanol mandate – were not good.

Since that time, Pacific Ethanol has fallen from $22.54 down to today’s value of $9.97. Given that Gates’ purchase price was $16.00 a share – and the stock ran up to ultimately around $40 before collapsing – it looked like a shrewd move for a while. And I lost count of how many people – when arguing with me about ethanol – pointed out that Bill Gates and Vinod Khosla were investing in it, and that was good enough for them. After all, who did I think I was to contradict a couple of billionaires on their vision of the future? (Of course, one billionaire – Mark Cuban – did listen).

But the fundamentals were not there. I believe that Gates finds himself in this position – and I don’t believe he has seen the last of his (long-term) losses in this stock – because he had to rely on others to give him direction in his case. He was outside his area of expertise. And while people seem to automatically assume that Bill Gates’ genius in the computer industry somehow translates across other industries, this is not the case. I have said the same about Vinod Khosla – expertise in one area does not transfer to a completely different industry, so you better take his ethanol claims with a very large dose of salt. I believe that he will ultimately lose out in a very big way with his ethanol investments. He may sell into some hype and make a bit of money now, but if he stays in for the long haul he will not fare very well.

Continuing on this theme, today several ethanol stocks, including Pacific Ethanol, were downgraded by a major brokerage firm:

Ahead of the Bell: Ethanol Downgraded

NEW YORK (Associated Press) – A Friedman Billings Ramsey analyst downgraded three ethanol producers Thursday, slashing his price targets and predicting the industry’s “growing pains” will continue due to small profit margins and oversupply.

Ethanol production margins have dropped to 15 cents per gallon from 75 cents in mid-May, said Eitan Bernstein, as the price of ethanol has dropped. He said prices will stay low through 2008, and reduced his ethanol price estimates for 2007 to 2010.

Bernstein cut his rating on Aventine Renewable Energy Holdings Inc. to “Underperform” from “Outperform,” reducing his price target to $9 per share from $24. The stock closed at $11.68 Wednesday. He downgraded VeraSun Energy Corp. stock to “Market Perform” from “Outperform,” halving his price target to $12 from $24. The stock finished at $12.02 on Wednesday, and was unchanged in premarket trading. The analyst now rates shares of Pacific Ethanol Inc. “Underperform,” down from “Market Perform.” He cut his price target to $8 from $15. Shares ended Wednesday trading at $11.17.

Bernstein’s downgrades come a day after Aventine President and Chief Executive Ronald Miller addressed investors at a Bank of America conference. Miller said the industry is in a very difficult time due to declining margins, and expects conditions to stay hard until 2009.

Shouldn’t that downgrade have come before the stock price crashed? Of course if you have read this blog for long, you know that I have been warning about this for a long time. Here was a warning I gave 6 months ago:

When a commodity has such incredibly low barriers to entry, it is only a matter of time before capacity is overbuilt and the price crashes. That’s why I expect ethanol producers to continue lobbying congress to increase the amount of mandated ethanol usage and to accelerate the timeline. Otherwise, a lot of ethanol producers will struggle to stay in business in the next few years as their increased demand for corn continues to increase the price, while all the new ethanol capacity is flooding the market. Profit margins will evaporate (although corn farmers should earn a windfall). What we may see is a bail out reminiscent of the Savings and Loan debacle of the 1980’s.

Looks like Wall Street is finally coming around, although a bit too late for many investors. It may not matter much in the end to a billionaire, but it will to the people who tried to emulate them by following their investment strategy.

September 21, 2007 Posted by | Bill Gates, ethanol, ethanol prices, investing, Vinod Khosla | Comments Off on Bill Gates’ Ethanol Losses

Bill Gates’ Ethanol Losses

About the same time I was warning last year of an ethanol bubble, Bill Gates was sinking money into Pacific Ethanol (PEIX). In the same essay in which I warned of the bubble, I took a look at Pacific Ethanol, and concluded that the underlying fundamentals of the stock – even with the ethanol mandate – were not good.

Since that time, Pacific Ethanol has fallen from $22.54 down to today’s value of $9.97. Given that Gates’ purchase price was $16.00 a share – and the stock ran up to ultimately around $40 before collapsing – it looked like a shrewd move for a while. And I lost count of how many people – when arguing with me about ethanol – pointed out that Bill Gates and Vinod Khosla were investing in it, and that was good enough for them. After all, who did I think I was to contradict a couple of billionaires on their vision of the future? (Of course, one billionaire – Mark Cuban – did listen).

But the fundamentals were not there. I believe that Gates finds himself in this position – and I don’t believe he has seen the last of his (long-term) losses in this stock – because he had to rely on others to give him direction in his case. He was outside his area of expertise. And while people seem to automatically assume that Bill Gates’ genius in the computer industry somehow translates across other industries, this is not the case. I have said the same about Vinod Khosla – expertise in one area does not transfer to a completely different industry, so you better take his ethanol claims with a very large dose of salt. I believe that he will ultimately lose out in a very big way with his ethanol investments. He may sell into some hype and make a bit of money now, but if he stays in for the long haul he will not fare very well.

Continuing on this theme, today several ethanol stocks, including Pacific Ethanol, were downgraded by a major brokerage firm:

Ahead of the Bell: Ethanol Downgraded

NEW YORK (Associated Press) – A Friedman Billings Ramsey analyst downgraded three ethanol producers Thursday, slashing his price targets and predicting the industry’s “growing pains” will continue due to small profit margins and oversupply.

Ethanol production margins have dropped to 15 cents per gallon from 75 cents in mid-May, said Eitan Bernstein, as the price of ethanol has dropped. He said prices will stay low through 2008, and reduced his ethanol price estimates for 2007 to 2010.

Bernstein cut his rating on Aventine Renewable Energy Holdings Inc. to “Underperform” from “Outperform,” reducing his price target to $9 per share from $24. The stock closed at $11.68 Wednesday. He downgraded VeraSun Energy Corp. stock to “Market Perform” from “Outperform,” halving his price target to $12 from $24. The stock finished at $12.02 on Wednesday, and was unchanged in premarket trading. The analyst now rates shares of Pacific Ethanol Inc. “Underperform,” down from “Market Perform.” He cut his price target to $8 from $15. Shares ended Wednesday trading at $11.17.

Bernstein’s downgrades come a day after Aventine President and Chief Executive Ronald Miller addressed investors at a Bank of America conference. Miller said the industry is in a very difficult time due to declining margins, and expects conditions to stay hard until 2009.

Shouldn’t that downgrade have come before the stock price crashed? Of course if you have read this blog for long, you know that I have been warning about this for a long time. Here was a warning I gave 6 months ago:

When a commodity has such incredibly low barriers to entry, it is only a matter of time before capacity is overbuilt and the price crashes. That’s why I expect ethanol producers to continue lobbying congress to increase the amount of mandated ethanol usage and to accelerate the timeline. Otherwise, a lot of ethanol producers will struggle to stay in business in the next few years as their increased demand for corn continues to increase the price, while all the new ethanol capacity is flooding the market. Profit margins will evaporate (although corn farmers should earn a windfall). What we may see is a bail out reminiscent of the Savings and Loan debacle of the 1980’s.

Looks like Wall Street is finally coming around, although a bit too late for many investors. It may not matter much in the end to a billionaire, but it will to the people who tried to emulate them by following their investment strategy.

September 21, 2007 Posted by | Bill Gates, ethanol, ethanol prices, investing, Vinod Khosla | Comments Off on Bill Gates’ Ethanol Losses