Ethanol Plays Regain Energy

This column was originally published on RealMoney on June 21 at 4:04 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

The media and investors have paid considerable attention lately to the prospects for making money by investing in stocks involved in the production of ethanol. My models shows that four of these stocks in particular could grow into winners.

Interest in ethanol investments resurfaced last week with the initial public offering of VeraSun Energy(VSE Quote), which began trading on June 14. VeraSun was priced at $23 and traded as high as $30.75 on its first day, but faded to a low of $24.50 last Thursday. While my models do not have enough data or information to evaluate IPOs, it appears that this one-week range is tradeable.

Tuesday, the American Stock Exchange listed Xethanol(XNL Quote), another play on ethanol. As with VeraSun, I can't evaluate this new ethanol play until it has a trading history, but it is worth making note of, despite its small market capitalization. Xethanol operates two ethanol production facilities in Iowa.

At the May 16 meeting of the Society for the Investigation of Recurring Events, Delos Smith, president and chief economist at Delos Smith & Associates, was particularly concerned about energy. In his view, the problem with energy is that global demand for crude oil has reached 85 million barrels a day and supplies are tight. With 235 million cars on the road, U.S. refineries are running at full capacity, and 40% of the output in the U.S. comes from two cities that could be hard hit during the hurricane season. Delos sees a big future in ethanol to solve our energy needs. Delos said that instead of paying farmers not to grow corn through subsidies, we should encourage it and build the facilities to convert it to ethanol, citing Brazil's successful use of sugar-based ethanol to reduce oil use.

My models show that Nymex crude oil peaked at $75.35 back on April 21 and has been trading sideways to down since then. Ethanol stocks have declined with crude oil, as the hype around oil's peak (and need for an oil replacement) has subsided. The weekly chart profile for crude oil is negative, with support this week at $66.43 and the five-week MMA at $70.34. My monthly and semiannual supports are $64.52 and $64.58, with quarterly resistance at $75.94. With crude oil likely to stay in an elevated trading range, I expect ethanol stocks should regain their energy.