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Investors Turn Bullish on U.S. Ethanol Shares

After a weak start in 2016, investors are rediscovering shares of biofuels companies that make ethanol, a grain alcohol that can be used as fuel.

Demand and profit margins are up, regulators are helping the industry, and consumers are embracing ethanol for new uses, including on commercial flights.

Shares of Green Plains Inc are up about 30 percent since mid-May, while Pacific Ethanol is up about 38 percent. Much larger Archer Daniels Midland Co, a global agribusiness that’s also a top ethanol producer, is up about 14 percent.

Alaska Air’s announcement this week that it flew two jets using Gevo’s jet fuel made from sustainable corn sparked a brief, sharp rally in shares of that tiny company.

It was the latest bit of supportive news for ethanol companies, which some investors now view as starting an uptrend.

“When you look at the big picture of what’s going on with ethanol, there’s an improvement in sentiment. You’re starting to see a better risk-reward (balance) for ethanol equities,” said Michael Underhill, co-portfolio manager of the RidgeWorth Capital Innovations Global Resources and Infrastructure Fund.

Green Plains and other biofuels shares got a boost last month following U.S. regulators’ proposal to increase the amount of corn-based ethanol and biofuels that must be mixed into diesel and gasoline next year.

Demand is rising, said Roth Capital Partners analyst Craig Irwin, who has “buy” ratings on Green Plains as well as Pacific Ethanol.

Midwest prices of ethanol, which hit their highest in just over a year this month, have lifted margins for producers.

Increased gasoline consumption has also helped ethanol producers, Irwin said. U.S. ethanol output rose to near-record rates last week.

“Ten percent of the gasoline in your gas tank is actually ethanol. Most people don’t think about that,” he said.

The stocks are also benefiting from deal activity in the broader agribusiness area, Underhill said, including Bayer’s offer to buy Monsanto.

RidgeWorth owns Green Plains shares and has a $30 target on the stock, about 50 percent above its current price.

To be sure, Green Plains shares are still down about 16 percent so far this year, and valuations in the group are mixed.

Green Plains is trading at about 35 times its projected earnings for the next 12 months, though Archer Daniels Midland’s forward price-to-earnings ratio is about 16, below the S&P 500’s forward P/E of 17.2.

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