Ethanol: Live Fast, Die Young, Take Profits

The cycle is familiar. You start with the highest-quality stocks in the sector. Here it was Archer Daniels Midland(ADM Quote), which I recommended last August, and you could've made a lot of money in it. Then we took up The Andersons(ANDE Quote), the grain elevator guys, and that made you a lot of money, too. Then we took up MGP Ingredients(MGPI Quote), up big today, but Tuesday night their COO came on the show and told us we'd gotten ahead of ourselves.

The CEO says that and the stock is up? You got lucky that we're at the end of this ethanol speculation cycle. See, now everyone else is starting to pile in; that's the time for you to get out.

And now the investment bankers are in on the game. That's how supply gets created; they bring these ethanol companies public, and too many names will eventually spoil the sector because there will just be too much supply. I was out with an ethanol executive the other night who said he was taking more meetings with I-bankers than with customers. That's a bad sign. These ethanol companies are like high-school kids being recruited for big-league ball. It's ridiculous.

So don't believe the hype. VeraSun, up huge today, means sell. If you'd bought the dot-com hype at the height of the speculative bubble, you'd have been crushed. Or just look at solar power since March; the same thing happened there that's happening with ethanol now. The market got overwhelmed with supply, too many solar companies, and the speculative bubble ended. The stocks came down.

You can either go crazy for ethanol now, or gracefully take your profits and wait for the next speculative bubble. I recommend the second course. See, ethanol was never, and probably will never, be all that serious an alternative to gasoline. Right now it accounts for maybe 3% of fuel use in America. You need to use tons of natural gas to make it, and that means any increase in natural gas prices will just crush these ethanol guys. And finally, since it corrodes pipelines, you need to transport it by train or truck or barge, not pipeline.