Friday, August 25, 2006

Calls of Note Part 3

- Friedman, Billings, Ramsey notes they believe much of the industry's recent underperformance relates to concerns regarding long-term oversupply. In order to help investors better assess this issue, the firm expanded their proprietary plant-by-plant model to reflect the vast number of capacity addition proposals currently out in the market. However, they believe that the demand side of the equation remains vastly underappreciated by most investors and expect the U.S. government to significantly increase the Renewable Fuels Standard in 2007, which should be a positive catalyst for the stocks. Firm reiterates Overweight rating on the sector with Outperform-rated Aventine Renewable Energy (NYSE:AVR) and VeraSun (NYSE:VSE) their top recommendations.

Given the strong political backing for ethanol, driven by energy security concerns, agricultural interests, and environmentalists, they expect Congress to increase the Renewable Fuels Standard in 2007, lending long-term support to ethanol prices and, they expect, materially improving investor sentiment. Excess supply above mandated volumes should result in lower ethanol prices, which would result in incremental discretionary demand. Firm's 2008+ price forecasts assume oversupply in the market and that ethanol trades at only about $0.35/gallon above wholesale gasoline.

Firm notes that over the past two weeks, AVR has lost roughly 20% of its value, they believe largely due to concerns regarding the August 28th lock-up expiration on 20.8 million private placement shares. The stock is currently the cheapest in the group and, in firm's view, should trade up following the lock-up's expiration.

Notablecalls: Fascinating! But utterly useless as well. At least today. This thing may lose an additional 10% in mkt cap just like that. To catch a bounce in this one, look for a strong volume day with some block trades (200-500K shares) crossing the tape. This means the insiders most eager to sell have sold their shares to inst buyers (usually strong hands).

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