Our Gevo Stock Prediction In 2019 (Buy or Sell?)
Oil baron John D. Rockefeller had amassed a fortune when he died in 1937 that in today’s dollars would be worth roughly $340 billion. He holds the record as the richest American ever and certainly one of recorded history’s richest persons.
For generations, the Rockefeller surname has been synonymous with vast wealth. How did he reach the pinnacle of capitalist success? By accumulating undervalued energy investments that exponentially appreciated in price as they went on to dominate their markets.
Investors now face a similar once-in-a-lifetime opportunity with renewable energy, biofuels in particular.
Is small biofuels maker Gevo (NSDQ: GEVO) the next “Rockefeller stock?” Is it poised to generate enormous riches for its early investors? Or is this small-cap energy company more hype than promise? Let’s drill down for the facts.
What is Gevo?
With a market cap of $20 million, Gevo is a renewable chemicals and advanced biofuels company headquartered in Englewood, Colorado. The company develops bio-based alternatives to petroleum-based products by applying biotechnology to conventional chemistry.
Gevo converts renewable raw materials into isobutanol and renewable hydrocarbons that can be directly integrated into existing fuel and chemical products. Isobutanol is a four-carbon alcohol that can be used as a specialty chemical or a value-added fuel blendstock.
In Texas, Gevo operates a biorefinery that concerts alcohols into products that range from renewable jet fuel to octane and ingredients for plastics.
How Has Gevo Stock Performed?
As with any small-cap stock involved in leading-edge technology, Gevo has been volatile and subject to huge swings on the upside and downside.
Gevo shares skyrocketed a whopping 270% on June 18, 2018, after the company received approval from the U.S. Environmental Protection Agency (EPA) for the use of isobutanol at a 16% blend level in gasoline, up from the previously approved level of 12.5%.
Before the EPA’s ruling, 16% blend levels of the biofuel were approved only for off-road applications and boats. The ruling was widely seen as a significant catalyst for Gevo’s revenue growth, although investor sentiment quickly cooled.
The following chart shows Gevo share price movement over the past 12 months:
How Has Gevo Performed In 2017/2018?
- In 2017, Gevo stock fell 82.6% compared to a gain of 19.4% for the S&P 500.
- In 2018 year to date, Gevo stock has fallen 78.6% whereas the S&P 500 has fallen 2.6%.
Who Are Gevo’s Rivals?
Bunge (NYSE: BG)
The New York-based agricultural giant focuses on helping farmers produce larger harvests by providing a smooth connection between them and customers.
Bunge traces its history back nearly 200 years, to 1818, making it one of the world’s oldest agribusiness firms. Today, it boasts a market cap of $8.2 billion and has 32,000 employees in 40 countries.
The company’s agribusiness segment transports, stores and processes agricultural commodities, such as grains and soybeans. It also processes raw soybeans and rapeseed into oils and meal for use in animal feed.
Bunge’s other divisions include edible oils, which produces margarine and other products for the foodservice industry; sugar and biofuels with eight mills in Brazil that produce sugar and ethanol, as well as a London-based sugar trading and marketing arm; milling products, including milled wheat, corn and rice; and fertilizer.
Private company Syngenta has traditionally focused on herbicides, pesticides and genetically modified seeds. But in recent years the company has expanded into biofuels. The company now operates 30 ethanol/biofuel plants across 12 states.
Swiss-based Syngenta produces a number of specialized agriproducts with limited competition; the company also appears to be gaining market share in biofuel production.
The company is a subsidiary of ChemChina, a Chinese state-owned chemical company that develops agrichemicals, specialty chemicals and industrial equipment.
Green Plains (NSDQ: GPRE)
Based in Omaha, Nebraska, Green Plains is the second-largest owner of ethanol plants in North America. With a market cap of $646 million, the company operates through four segments: Ethanol Production, Agribusiness and Energy Services, Food and Ingredients, and Partnership.
In addition to ethanol production, the company’s other products and services include: distillers grains, corn oil, grain storage, marketing and distribution, and cattle and food ingredients.
Will Gevo Go Up In 2019 (Should You Buy)?
Gevo enjoys several macroeconomic tailwinds. The biofuels industry is growing fast, mirroring the expansion of “green” energy.
Biofuels are liquid fuels derived from agricultural products. The most important biofuel in the U.S. market is ethanol, an alcohol made primarily from corn. Biofuels such as ethanol are supposedly cleaner and more efficient than fossil fuels but their overall benefits are a matter of debate.
Ethanol, for example, requires energy to create, takes vital food-producing cropland out of circulation, and ethanol plants can be major polluters.
Regardless, a cash-rich lobbying industry has arisen to protect biofuels and the industry has attracted considerable investor interest.
This video explains the details about the biofuel and ethanol industries:
Pike Research predicts the global biofuels market will grow from $82.7 billion in 2011 to $185.3 billion in 2021.
The U.S. is now the world’s leading producer of transportation fuel made from harvested plant material, producing at least half of the world’s biofuels supply. Ethanol, made mostly from corn starch from kernels, is by far the most significant biofuel in the U.S., accounting for more than 90% of biofuel production.
The U.S. government has incentivized the use of biofuels since the Energy Tax Act of 1978, which provided an exemption for ethanol from the federal excise tax on gasoline.
The watershed moment came with the Energy Policy Act of 2005, which mandated ethanol usage. The act created the Renewable Fuel Standard (RFS), which requires the nation’s fuel supply to contain increasing volumes of biofuel.
Various biofuel tax credits have expired over the years but mandates under the RFS remain in place and will keep ethanol demand strong.
Corn ethanol is the granddaddy of biofuels but it’s only a partial solution. The future of biofuels belongs to high-tech companies that are developing advanced second-generation biofuels. Corn ethanol and biodiesel are generated from food crops, whereas second-generation biofuels are derived from non-food biomass such as wood chips, farm and forestry residues, or municipal solid waste.
The RFS stipulates that advanced biofuels make up 22 billion gallons of the 36 billion gallons of biofuel required to be blended annually by 2022. Therein lies the opportunity for biofuel producers.
Also growing in demand is “ethanol free” gasoline, the other side of the biofuel coin. According to the U.S. Energy Information Administration (EIA), the market size for ethanol free gasoline is about 5 billion gallons per year, outside of reformulated gasoline (RFG) regions. RFG areas are required to sell gasoline containing an oxygenate. The RFG program was mandated by Congress in the 1990 Clean Air Act amendments.
Since ethanol mandates started to come upon the scene, ethanol was the only gasoline oxygenate available. However, Gevo’s isobutanol provides ethanol free gasoline for use in RFG areas. When RFG regions are included in the market size estimation, the total ethanol free market is expected to be about 7 billion gallons per year.
Gevo develops its products based on synthetic biology, as well as conventional biology and chemical industry production techniques. The company’s proprietary processes convert carbohydrates to low carbon chemicals and fuels. Gevo has developed technology to retrofit existing ethanol production plants to produce isobutanol.
The EPA’s decision in June 2018 opens a potentially vast new market for Gevo.
Will Gevo Go Down In 2019 (Should You Sell)?
That’s the bull case — but it mostly applies to the biofuels market in general. Despite these macroeconomic and policy advantages, Gevo is a vulnerable stock that’s likely to continue disappointing investors.
Keep in mind, Gevo reverse split its stock 1-for-20 on June 1, 2018 to avoid getting de-listed on the stock exchange. This cut the number of shares outstanding from 25.8 million shares to about 1.3 million shares.
In December 2018, in the waning days of the Republican-controlled House, the ruling GOP pushed for the elimination of biofuel mandates, calling them wasteful and unnecessary regulations that interfere with the free market.
Biofuel mandates may have a better time in the House under Democratic control, but the political winds could be shifting against biofuels.
What’s more, Gevo faces huge competitors that boast considerable financial resources and global market reach.
Overall Gevo Forecast And Prediction For 2019
Gevo is a volatile penny stock that has badly lagged the broader market. This under-performance is likely to continue in 2019.
The company’s fundamentals aren’t pretty. In the most recent quarter, the company generated a profit margin of -76.7%, return on equity of -31.6%, and EBIDTA (earnings before interest, taxes, depreciation and amortization) of -$13.7 million.
To be sure, Gevo stock spiked in June 2018 following the favorable EPA ruling. The soaring share price generated a lot of breathless news headlines. However, the euphoria soon wore off as investors realized that thinly capitalized Gevo has a weak balance sheet and faces formidable competition in a turbulent industry.
Gevo has consistently posted net quarterly losses and I don’t see much hope of the company turning around its performance anytime soon.
The biofuels industry holds great future promise, but Gevo is too risky. Don’t get blinded by the hype surrounding this microcap stock. There are better — and far safer — places for your money.
John Persinos is the managing editor of Investing Daily.