BioBears: Who’s Shorting What in the Advanced Bioenergy Financial Market?

In investing there are the longs and the shorts — while most investors take “long” positions, simply owning stocks and bonds, many traders “go short” when they think the stock is overvalued and ready to drop. The returns can be substantial, though the risks precarious.

Without getting deeper into the mechanics of short trading, the percentage of shares that are held as a “short interest” can be a pretty good barometer of market sentiment regarding a stock — not so much a negative sentiment on the company itself, but a sense that it is overpriced. And that’s why, when markets careen around in periods of tremendous volatility due to external market forces such as oil prices, looking at short interests can be an interesting way of seeing whether Company A or Company B may have “weathered the storm”.

If short interests are low or on the decline, it can be an indication that the marlet sees a bottom in the stock, or the potential for share value appreciation in the near term. It’s not a foolproof method, but one factor to take into account when evaluating the sector’s health.

Over the past six months — mostly because of the oil price debacle but sometimes because of commercialization delays or dilutive capital raises, the renewables sector has taken a beating.

Share Prices in the Biofuels Digest Index

Here’s a selection of roughly half of the Biofuels Digest Index stocks (those traded on US exchanges that report short interests, and excluding several oil majors in the BDI), that illustrates the impact of the fall in energy prices on market prices. These prices reflect the period 7/31/14 through to 1/30/15 (the latest date for short interest reporting by NASDAQ).

In the case of Solazyme, a capacity build-up delay we reported in November caused a major revaluation of the stock, and Gevo had a major equity issue in the fall that diluted prices. But overall, the drops were substantial — the sector was devastated by falling energy prices, which in some cases weighed on revenue expectations; in others, on the viability of the company itself and its ability to compete with fossil-based molecules. Especially with renewable chemicals, which were thought to be a safer haven than fuels, because higher prices were more important than the smaller volumes.

Escapees from the bad news? The big upstream companies – seed and crop companies like Monsanto, DuPont and Syngenta thrived in the period, and Codexis, which has transitioned to a “pharma-based” valuation and market position.

Short Interests

So let’s look at short interest, as a percentage of the outstanding shares in the company. These are the biggest “bearish” signs — again, not on the viability necessarily of the company, but bearish on the current stock price.

Here, we see Solazyme, Green Plains, Pacific Ethanol, Renewable Energy Group, Amyris and Gevo at sharply elevated levels compared to the others. Clearly, there are concerns among investors that the first quarter outlook for biodiesel and for corn ethanol may not be well expressed in current share prices.

Aemetis is an outlier here, with a much smaller short interest that may reflect investor sentiment that the bigger share price drop in AMTX since July might have “priced in” expectations better than for Green Plains or Pacific Ethanol.

For sure, there are elevated concerns that more share price pressure may be on the way for the trio of advanced industrial biotech companies — once focused mostly on fuels, now a blend of fuels and chemicals with a decided nod to chemicals and ingredients in the case of Amyris and Solazyme.

The Change in Short Interests — Who’s Up, Who’s Down?

Let’s look at our comparable set a slightly different way, in terms of the change in short interests. A drop in short holdings is a pretty good indicator that that market is seeing rising (or falling) opportunities to make money off further stock price declines.

In the case of Aemetis and Evogene, the short interest is expanding, but off a very small base of shorts, and Abengoa has the lowest short interest of any stocks in this set. So, let’s consider those outliers. There is a rising level of short interest in Pacific Ethanol, and off a sizeable base of shorts already — so, a bearish signal for corn ethanol in the very short term.

But most of what we see is a reduction in short price interests. Mostly flat in the case of Solazyme, but a healthy decline in the case of Amyris, Gevo and especially Renewable Energy Group. Suggesting that convcerns on price reain at an elevated level, but are abating, like the decline off a high tide.

Signs of Rally Pressure Building?

One other way to look at short interests is in the “days to cover”, which divides the number of shares held short into the average daily trading volume. It’s a potential indicator of share price volatility. In the case of short holdings, traders have “borrowed” the shares and sold them, and have to buy back the shares later on to return to the original owner.

So, when the “days to cover” ratio gets really high, it can be an indication that — if the company were to release positive market news and start a price rally — the “shorts” might find themselves in a position where the share prices could elevate very rapidly as all theose short positions get “closed out” through share buy-backs. A big ratio can be a leading indicator of future buying pressure.

In the case of our comparable set, we see a lot of potential future price pressure for Amyris and Solazyme, especially, but also Renewable Energy Group, Evogene and to a lesser extent Green Plains. If trading lightens up in Gevo, as well, that large short interest might be a good indication of future buying pressure.

The Bottom Line

It’s been a rough patch for renewables equities, no doubt about it — oil prices, primarily, have been the cause of major price falls. But the overall short interests are generally falling, on a percentage basis, and there’s some evidence in “days to cover” and falling “short interest by percentage” that short-term rally pressure may be building.

Note: That signal should always be taken as one sign among many to consider, and most investors are usually best advised to expose themselves to the volatility of small-cap, early-stage technology stocks only in the context of a balanced portfolio approach.

Meanwhile, there are also reasons to see short-term pressure on corn ethanol producers — so Q1 may not be quite as rosy for earnings as Q4 proved to be for many now reporting full year 2014 results. But we’ll see about that when the Q1 numbers start coming out in three months or so.

This article was originally published on Biofuels Digest and was republished with permission.


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