Cheaper Oil Puts Alternative Stocks on the Back Burner
This column was originally published on RealMoney on Sept. 20 at 2:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
A slowing economy, a hurricane-free Gulf of Mexico, luck on the geopolitical front and the unwinding of speculative positions seem to have burst the energy bubble: Nymex crude oil has declined 22.5% from its all-time high of $78.40 set on July 14 to this morning's low of $60.75 per barrel. A longer-term secular uptrend remains in place, but for the short-term, the need to find alternative energy sources suddenly seems less pressing.
With most of alternative energy's go-to names now much lower than they were in early August, it's certainly not the best time to take profits on or add to core positions. That said, it's also not yet time to exit the group. We haven't seen the last of higher oil prices, which tend to inspire interest -- and tradable volatility -- in stocks related to alternatives.
Take a look at what's going on now in oil to get a feel for what could affect alternative-energy stocks. The secular bull market in crude oil began after a low of $10.35 per barrel in December 1998. After crude hit a high of $37.15 in September 2000, the first correction achieved a low of $17.12 in November 2001. A solid uptrend followed, until the bubble peaked in mid-July this year.Even as the bubble was inflating and energy bulls were calling for crude oil to reach $100 per barrel oil, my model suggested otherwise. My price target for crude remains my annual support of $51.87, which appears achievable by the end of 2007, if not sooner. This is likely to line up with a test of the 200-week simple moving average, which was rising at $47.60 this week when last tested as the secular uptrend back in October 2003, when this average was $29.95. With decreased demand for energy and the big oil find in the deep waters of the Gulf of Mexico, alternative sources of energy will be put on the back burner. While it may take up to three years to pump oil out of the deepwater field, energy experts say that alternatives such as ethanol may take 10 years to reach critical mass. This hasn't gone unnoticed in the alternative-energy community. Frank Curzio pointed out in the Columnist Conversation on Tuesday that Hawkeye Holdings, the third-largest ethanol producer in the U.S., decided to delay its IPO -- temporarily -- due to the recent pullback in the energy segment. Curzio also pointed out the poor performances of ethanol IPOs Aventine (AVR), which began trading on the NYSE Aug. 29 at $39 a share and has since traded below $24, and VeraSun (VSE), the second-largest ethanol producer in the U.S., which debuted on June 15 at $28 a share and now trades around $18. So as alternative energy takes a back seat to mainstream fuels, check out the current profiles for several alternative-energy names, which I last updated Aug. 11.
These stocks require patience and caution here
|Sept. 19 Close||Rating||% UV/OV||Fair Value||MOM||5-Week MMA||Value Levels||Pivots||Risky Levels|
|Archer Daniels (ADM)||$38.48||BUY||-6.60%||$41.21||DM||$40.05||33.47 S||38.95 Q||48.85 M|
|The Andersons (ANDE)||$37.21||BUY||-7.70%||$40.30||RM||$38.59||31.05 Q||39.33 Q||54.36 M|
|Evergreen Solar (ESLR)||$8.74||HOLD||-10.90%||$9.81||F||$9.60||none||12.27 M|
|Headwaters (HW)||$23.35||HOLD||-8.90%||$25.63||RM||$22.88||none||22.99 M||29.78 M|
|MGP Ingredients (MGPI)||$23.41||HOLD||18.00%||$19.84||RM||$23.03||18.49 S||26.06 M|
|Pacific Ethanol (PEIX)||$15.28||HOLD||-26.60%||$20.83||OS||$17.69||none||28.41 M|
|Key: MOM, momentum; OB, overbought; DM, declining momentum; RM, rising momentum; OS, oversold; F, flat; M, monthly; Q, quarterly; S, semiannual; A, annual. A value level is a price at which my models project that buyers will emerge; a risky level is a price at which investors are likely to reduce holdings, according to my models. A pivot is a value or risky level that has been breached in its particular time horizon; the stock will likely trade around this pivot.
Source: Global Market Consultants
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