Beware of the Allure of Ethanol Investing

I am a fan of ethanol. The addition of corn ethanol to our US fuel supply chain has had a significant impact on keeping gasoline prices way lower than they otherwise would have been, and has paid for the subsidies many times over. But that has not translated to gains for ethanol stocks, which are down on the order of 50% over the last year according to the Camino Energy index, and it won't change anytime soon.

As the bellwether US ethanol pureplays are finally down to earth, my predictions have come to pass. Two years ago ahead of Verasun's (VSE) IPO, I blogged an analysis saying I thought Verasun should trade in the $3 to $8 range, depending on the margin, PE, and growth assumptions. The bankers and the market thought I was nuts, treating VSE and Aventine (AVR) which listed near the same time as technology style growth stocks.

The company listed at several times my