Experts caution against overfill of ethanol in portfolio

10/22/2006

Investing in ethanol was a high-octane activity this year, especially when the price of regular gasoline surpassed $3 a gallon.

Although interest has diminished with lower gas prices, an average investor can buy company stocks or mutual funds that concentrate on ethanol production, but few will be able to shell out several thousand dollars to directly fund one of the new factories springing up around the country.

"There's huge interest in ethanol," said Charlie Rentschler, a 30-year agribusiness analyst now with Wall Street Access, a New York firm.

About 110 ethanol plants are in operation nationwide, and 50 more are under construction. Within two years, production of ethanol could be up to 9 billion gallons annually. The Andersons Inc., a suburban Toledo agribusiness, is involved with five such plants or proposed plants.

Dennis Marzoc, of Rossford, said he bought 25 shares of The Andersons several years ago for under $10, only to watch the stock soar in the past two years, peaking at more than $120, then splitting 2 for 1, and last week trading at about $38 a share.

"I knew The Andersons was a good company," said the 19-year member of the Toledo fire department. When the split was announced, he said, "I wanted to get a home-equity loan [to buy more shares], but that's taking a risk."

The ethanol and general energy sector has been one of the hottest investment areas, attracting individual investors and corporate cash, hedge funds, mutual funds, and private-equity firms.

The allure is that the alternative fuel, which is mixed with regular gas, could help cut America's dependence on foreign oil.

Mr. Rentschler, the analyst, cautioned that ethanol investments are not for everyone. The factories typically cost $50 million to $80 million and can take years to yield a return on the investment.

"There's enormous risk," he said. The prices of corn, natural gas, and oil could harm ethanol producers.

"I would say interest has waned," said Wallen "Buzz" Crane, senior vice president in Smith Barney's Toledo brokerage. One ethanol stock, Pacific Ethanol Inc., quadrupled in price this year, then fell off sharply.

Robert Heisler, manager of an Edward Jones office in Sylvania, said there are more sellers than buyers of ethanol stocks now, but he recalled half a dozen buys recently.

His firm's analysts in St. Louis are lukewarm about ethanol.

Energy analysts Lanny Pendill and Amy Song recommend that no more than 8 percent of an individual's stock portfolio be in energy, and they suggest that should be concentrated mostly in traditional oil companies. They recently said the outlook for sustainable growth for the U.S. ethanol industry is "highly uncertain."

Still, Mr. Rentschler has a "buy" rating on The Andersons, not because of ethanol alone, but because it is a well-run firm involved with grain handling, general stores, turf products, and railcar leasing.

Analysts' opinions about companies in the industry vary. The main analyst following Pacific Ethanol - which got an $84 million infusion from billionaire Bill Gates - recently lowered the rating on its stock to hold from buy.

Agribusiness giant Archer-Daniels Midland Co., the biggest player in the ethanol industry, has five analysts suggesting a buy, four recommending holding, and one calling for selling. Three main analysts have a buy rating on The Andersons stock.

A number of mutual funds have large stakes in such companies as Archer-Daniels-Midland and The Andersons, as do a number of hedge funds that typically cater to high rollers.

The market is opening up to numerous smaller companies, including start-ups such as Aventine Renewable Energy Holdings Inc., which began trading in May; VeraSun Energy Corp., launched in June, and Southridge Enterprises Inc., which trades on Nasdaq's Bulletin Board electronic quotation system.

Several ethanol investment cooperatives have sprung up in the Midwest selling limited partnerships in proposed plants, typically for $20,000 and up. But those investors must have high net worth or high incomes. One such group recently raised $45 million in western Ohio and eastern Indiana.

Experts say stocks and bonds of companies that primarily produce ethanol are riskier than typical investments, and they urge investors to allot only a small percentage of their portfolios to ethanol. In the case of bonds, experts advise checking the bond rating to determine how risky it might be.

Some large companies also are getting involved in ethanol, such as Marathon Oil Co., which is partnering with The Andersons to build ethanol plants.

One longtime Andersons shareholder, Kelly McCloskey, of Maumee, said she was delighted the local firm got into ethanol, adding, "I'll certainly purchase more stock."

Many area investors said they have waited too long to get in on the ground floor of the ethanol industry.

Dave Ronau, of Maumee, an Internet sales manager for Allied Building Products in Toledo, said he strongly considered buying stock in The Andersons before it got hot late last year.

"Actually, I've been kicking myself," he said.

Contact Homer Brickey at: homerbrickey@theblade.com or 419-724-6129.