The Rude Awakening
Wall Street, New York
Wednesday, June 21, 2006

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• Ethanol plays good for the long term, perhaps not so
  sweet right now...
  
  
• A bevy of IPOs hit the Street – learn what the
  insiders are doing with their shares,
  
  
• How to annoy the Wall Street jerks, check your market
  data and more...

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Ethanol Glut...on Wall Street
By Greg Guenthner

[Ed. Note: Greg Guenthner is a contributing editor to Penny
Sleuth – a free e-letter dedicated to exposing
opportunities in the highly profitable world of small-cap
stocks. Check it out here:
http://www.pennysleuth.com/Sub/AFXPROMO3.html]

Ethanol is a rock star on Wall Street, and every brokerage
firm knows it. That's why the pin-stripped hucksters at
Wall and Broad have been dressing up lots of ethanol
companies as hot new IPOs to sell to an adoring public.

Ethanol's long-term growth prospects are very real, of
course. This bio-fuel seems certain to capture a growing
share of the liquid fuels market. But even so, ethanol may
have become a bit too popular with investors...for the
time-being. That's why every brokerage firm on Wall Street
is trying to sell ethanol-focused companies to the public –
looking to grab the easy money while it's still available?

Ethanol will be one of several alternative fuel sources
that will help break the country's petroleum habit. A
growing variety of other alternative fuels – like
biodiesel, liquefied natural gas and gasified coal – will
also play a growing role. But in the here and now, ethanol
stocks have become a bit frothy and speculative.

The recent crop of ethanol IPO's will certainly produce
some winners. But others will stumble badly. Quality is
key. On top of the ethanol heap is Archer Daniels Midland
(NYSE: ADM), with a 30% share of the domestic ethanol
market. The company's stock has a market cap of nearly $26
billion and sells for about 20 times estimated earnings.

The second-largest ethanol producer in the U.S., VeraSun
Energy (NYSE: VSE), debuted on Wall Street last week. The
IPO raised enough money for VeraSun to skip over the world
of small-caps, posting a market cap today of more than $1.9
billion. In fact, VeraSun's shares were up 30% on its first
day of trading last week. (The IPO was at $23 per share, a
little more than expected.) And after topping out at more
than $30 a share, VeraSun finished yesterday's trading at
$25.75. The stock sells for about 31 times estimated 2006
earnings.

And now that its bank account is brimming, the company is
readying itself for some serious growth. The proceeds from
VeraSun's IPO will go to more than double its ethanol
production by 2008 to 560 million gallons. (Right now,
VeraSun produces 230 million gallons of ethanol a year --
5% of total U.S. production.) Given VeraSun's breakneck
growth plans, we would not be surprised to see additional
stock offerings in the future – an event that sometimes
weighs on the price of a stock.

The next two ethanol-company IPOs standing in the queue are
Hawkeye Holdings and Aventine Renewable Energy Holdings,
the latter of which has a very close relationship with
VeraSun, which could cause problems for VeraSun down the
road.

"Aventine Renewable Energy buys virtually all of the
ethanol VeraSun produces," reports Robert Walberg in a
column Street Patrol. "Recognizing the potential conflict
of interest that creates, especially as Aventine starts to
increase its own production of ethanol, VeraSun has
informed Aventine that the distribution deal will end in
March 2007."

So it looks like VeraSun will be shopping for a new
distributor fairly soon. And if the company can't find a
way to get its product to the consumer, there could be some
delay to all of the growth the company has been talking
about.

Aventine – which Walberg compares to Pacific Ethanol
(Nasdaq: PEIX), another small-cap ethanol company – has
announced plans to offer 7.75 million shares at a range of
$37 to $41 per share.

But even this deal isn't all it's cracked up to be. Company
insiders are selling 1.4 million shares on the offering, or
about 20% of the total IPO. Heavy insider selling into an
IPO is not uncommon, but it is always unwelcome. The public
buyers would rather be buying alongside the insiders, not
FROM the insiders.

As a rule of thumb, it is rarely a good idea to buy
whatever Wall Street is eagerly selling. So now that
ethanol-company IPOs are pouring into the market, investors
should regard these newly minted stocks with a healthy dose
of skepticism.

Ethanol's long-term prospects may be very strong, but many
of these new IPOs will subject investors to sizeable short-
term risks. Proceed with caution.

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And the Markets...