Shares in the Sacramento, Calif.,-based alternative fuel company (PEIX) rebounded 6.6 percent Tuesday to close at $4.72. That followed a 22-percent drop on Monday, to $4.43, itself nearly one-tenth of the $42 share price that Pacific Ethanol traded at during the glory days of ethanol investment a mere year and a half ago.
Having a key investor sell off a significant stake in your company is tough to weather under the best of circumstances. But when the key investor is handling Bill Gates’ money, it’s a double whammy.
You can almost imagine the logic of other ethanol investors: Bill Gates knows a lot about making money. Bill Gates is ditching Pacific Ethanol. Why am I still investing in ethanol? At least it’s clearer why Gates is calling it Cascade Investments.
Two years ago, Cascade paid $84 million for what was then a 27 percent stake in Pacific Ethanol to help it become the largest producer of ethanol on the West Coast. Today, the 10.5 million shares Cascade bought is equal to a 20.5 percent stake in the company, which the current market is valuing at $39 million.
So Gates is down a little more than half his money on Pacific Ethanol, and it could be seen as something like poetic justice that the mere disclosure caused the market value of his investment to decrease by more than $18 million.
Financially speaking, at least, things were just starting to look up for Pacific Ethanol. After three straight years of net losses, from 2004 through 2006, the company had posted a $3 million profit in the first quarter of 2007 and a $2 million profit in the second. But a $6 million loss in the third quarter, announced Nov. 9, wiped out those profits. The news of Cascade’s planned sale came only days later.
Ethanol producers in general have been seeing hard times as prices are weighed down by a glut in supply. Yet companies are continuing to expand their production facilities on the expectation that demand will revive in the long run. As Goldman Sachs pointed out in a bearish research note that added to ethanol stock sell-off on Monday:
“Incredibly, all three companies we cover — Aventine Renewable Energy, Pacific Ethanol, and VeraSun Energy — are sticking with long-standing aggressive growth plans, even in the face of significant negative free cash flow and weak ethanol crush spreads.”
So Pacific Ethanol and its peers are doubling down, even while investors like Gates are doing the opposite. That’s making for some choppy stocks in the meantime.