“Like Buying Standard Oil at its Birth”

By Travis Johnson, Stock Gumshoe, August 16, 2007

If you want to get my goat, just start your teaser, “If you could own but one stock for the rest of your life, this would be it!”

Come on people, something a little more original, please!

Well, this fella is selling his service by essentially promising that this stock will turn you into a Rockefeller (not in so many words, of course). Buying these shares now is compared to buying Standard Oil before everyone had cars, or Boeing before air travel was commonplace, Microsoft, McDonald’s, bla bla bla.

Easy to find these in retrospect, of course.

And of course, he addresses his letter to “Aspiring Billionaire.” Myself, I’m a bit more modest. “Aspiring couple-extra-thousandaire” doesn’t really sound quite right though, eh?

The letter is from Luke Hodgens, of Powerhouse Profits from Trinity Research. I get terribly confused about all these incestuous companies in the investment newsletter world, but I don’t think I’ve heard from Mr. Hodgens before. His newsletter is “on sale” for $99 a year at the moment.

So where do we begin? What is this earth-shaking company that’s going to turn us all into John D. Rockefellers and Bill Gates’ and Ray Krocs?

Well, to start with this adviser calls ethanol “the only practical, realistic fuel of the future.” I find that kind of hard to take seriously, but I’m sure some people agree with him. So this is an ethanol company we’re dealing with.

Sooooo last year, don’t you think?

And in fact, the company in question is down quite a bit from where it peaked in 2006. Ethanol craze got a little long in the tooth there, I suppose, though these guys are actually (barely) profitable at the moment.

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Anyway, on to the clues: if we skip all that stuff about how high oil prices and global warming and voting farmers and eminently available switchgrass and government mandates all pile on to make ethanol the single best investment EVER …

deep breath …

One final tease for you from Mr. Hodgens: “I’m talking about a stock that has the potential to turn an investment of $10,000 into $100,000 in a matter of months…as much as$500,000 in a year or so…and down the road, millions as the world comes to depend on this one company for the fuel of the future.”

Doesn’t that make you want to slap someone? $10,000 into $100,000 in months, $500,000 in a year? Lets make our tantalizing promises a little bit more realistic, shall we? A simple double or two would suffice, I’d think, maybe over a few years?

So then, when I’ve blown off my steam, we get some clues about the actual company:

Bill Gates invested $84 million into this company.

(OK, so for the sophisticates out there, that’s probably enough — anyone can check out those SEC filings. For the rest of us, any more clues?)

Not really any exciting ones … but there’s this:

“This is your chance to make your own fortune by getting in early on the only purely-ethanol company with the manufacturing, marketing and distribution experience to take the ball and run with it.”

And this:

In “2004 they were selling $82 million worth of ethanol. In 2005 they did $100 million.”

“And by 2008, when a total of 6 new production facilities should come on line, it jumps to a whopping $380 million.And that’s just for the state of California.”

He also tells us that this company is the only “pure play” public company for ethanol. That dates him a bit, there is at least one more now — after all, wave a pile of money around and someone’s going to throw together a public company to take it from you. And of course, there are all the stocks, like Archer Daniels Midland or Deere, that are profiting a little bit less directly from ethanol.

So the ad is clearly pretty long in the tooth — But still, a reader came across it recently, the ad is still up, and it’s not like the company has already gotten its 100% or 500% gains (well, to be charitable, depending on when the ad came out it might have gotten a couple hundred percent if he timed it perfectly, but unless he sold he gave it all back in a matter of weeks) … so let’s check it out, maybe there’s something here.

Going primarily from the Bill Gates clue, this company has to be …

Pacific Ethanol (PEIX)

Gates’ Cascade Investments bought $84 million worth of this one way back in 2005 … so he’s probably got better profits on his holdings than do some more recent investors. But if you remember this one from the first half of 2006, when the ethanol craze pushed it to near $40 a share, you’ll probably be surprised to hear that it’s back down to about $11, probably only a dollar or two from Gates’ 2005 price.

They are still building plants, I think they have three active now and have several more underway, mostly on the West Coast. In other tidbits, they lost their CFO last month, and, if you believe the analysts, they’re now trading at surprisingly reasonable forward PE of about 18. They are even profitable now, which I was surprised to see, though their trailing PE is a bit more sobering at just under 300, according to Yahoo Finance.

I continue to be extremely skeptical of ethanol, whether it’s this corn-based stuff or the more hypothetical switchgrass ethanol that we teased out an enzyme company for a couple months back. Of course alternative energy solutions need to be found, but everything I read about ethanol tells me that if Iowa didn’t have the first presidential primary there’s no way on earth we’d seriously be trying to run our cars on corn. If they can come up with effective switchgrass ethanol techniques that don’t use up more energy than they produce, or if we can start importing more efficient Brazilian sugar cane ethanol (in which case, however, say goodbye to the Amazonian rainforests), then maybe I’ll be less hesitant … but so far, it seems like all we’re doing is jacking up food prices, in order to … also jack up gas prices. As the world population climbs, it’s going to seem more and more irresponsible to use corn to fuel our cars when it can be so much more efficiently used to fill bellies.

OK, but that’s just my personal peccadillo. There’s clearly interest in investing in ethanol, if not as much as there was last year (which is probably good), and this company and the other significant pure play, VeraSun (VSE), are both projected to be reasonably valued on next year’s earnings (though I say that with a very tenuous knowledge of either firm). Verasun, on the face of it, is quite a bit cheaper, by the way. Both are at lower share prices than they’ve seen in quite some time, so if you really believe that ethanol will bring us the next Standard Oil or Microsoft then perhaps now is the time to be buying with both fists. But personally, I think that’s a streeetch.

There are at least dozens of other ethanol-related companies, too, from big oil companies that have a few ethanol plants, to other alternative energy companies like Headwaters that have interest in a plant or two, to the engineering companies that build the plants, the dealers who sell tractors to these newly-rich corn farmers, the firms that truck the ethanol or try to develop tougher pipelines than can handle ethanol … the lists goes on, and you might even include GM on there after seeing their latest ads touting their flexfuel E85 vehicles.

I’m not interested, but that doesn’t mean there isn’t money to be made — feel free to convince me that I’m wrong.



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August 18, 2007 10:03 pm

Bill Gates also invested much more in Corixa and even at higher prices than the share price it was sold to GSK. that means nothing…

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August 19, 2007 11:17 am

Stay away from this Hodgens guy. 2 years ago, he claimed Electro Energy was the only stock you needed to buy. In addition, his Powerhouse Profits newsletter folded a year ago.

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