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28 Jul

GEVO: Shorts Fear ‘Black Swan’ Event, Says Jason Bond

by

Friday’s 14.1% move higher Friday on ‘no news’ resulted in GEVO shorts suddenly waking up to the prospect of being further overrun by a panic rush to cover as we move into the company’s scheduled earnings release of Aug. 8.

As long-time followers of Gevo, Inc. (GEVO) – its technology, management style and quirks, as well as the stock’s price action to material event (or, to no events) – Jason Bond issues this alert to GEVO shorts as to the dangers of maintaining a short position in this markedly volatile stock.

Prior trading patterns of the stock suggest to us that gambling on the short side before the company’s earnings report and conference call could be hazardous to an over-weighted short position in GEVO.

Contrastingly, if traders are long, we hope to briefly demonstrate that risks to the upside outweigh the risks to the downside as we approach the tentative date of the company’s earnings release and conference call of Aug. 8.

What Does GEVO Do for a Living?  And Why All the Drama?

“Gevo is a leading renewable chemicals and advanced biofuels company. We have developed bio-based alternatives to petroleum-based products using a combination of synthetic biology and chemistry. We produce isobutanol, a versatile platform chemical for the liquid fuels and petrochemical market. Isobutanol has broad market applications as a solvent and a gasoline blendstock that can help refiners meet their renewable fuel and clean air obligations. It can also be further processed using well-known chemical processes into jet fuel and feedstocks for the production of synthetic rubber, plastics, and polyesters. Gevo’s technology was designed to retrofit existing ethanol plants of all kinds.”  (SOURCE: Gevo, Inc. website)

The U.S. Coast Guard, Honda, Mercury, Total, Coca-Cola Company, Sasol Chemical Industries, Deutsche Lufthansa (with support from the European Commission) and other entities have rightfully come to the conclusion, in our opinion, that Gevo most likely has got the goods; it appears that further field testing, production tweaking and additional capital remain as the challenges to this potential jackpot company.

That list of marquee names, stated above, has always elicits investor attention in companies of Gevo’s size, thereby classifying GEVO to us as a ‘jackpot’ stock.

How many companies with a market cap under $50 million (and dire-looking cash flow statements) also evoke 40% and 35% of GEVO’s outstanding shares held by insiders and institutions, respectively?

The Bad & The Ugly Already Priced-In

Like all ambitious and noble plans of many microcaps which introduce novel products, Gevo has unfortunately had several meaningful setbacks to its plan to deliver its well-publicized and well-received isobutanol product to a market of both private and public multinational interests.

Delays in the development of the company’s Luverne facility in Minnesota, production of the product and deliveries have created a larger-than-expected cash burn at Gevo.

Moreover, fears of the company running out of operating cash are well-founded, as typical cash flow shortages at Gevo of more than $10 million per quarter represent a fraction of a year’s requirement to avoid bankruptcy.  As of Mar. 31, GEVO reported $8.4 million of cash.

As a result of the mostly negative news, GEVO has tumbled 52.5% for the year, and is down 64.2%, year-over-year.

gevo1

That in a nutshell is a brief executive summary of the Gevo tale of woes.

A recent article that delves a bit further into the ‘feel’ of Gevo’s recent challenges (including a legal one) was posted on Jul. 24 by a SeekingAlpha (SA) colleague, titled,Gevo: Unanticipated Positive Developments Will Shape Q2 Results.  We recommend JBP readers to review the article in addition to our analysis.

And note that the title of the Jul. 24 SA article includes the word “unanticipated,” which suggests to us that the author appears to grasp the potential setup to the one we see developing right now in GEVO; but the author was less bold in his assertion of the possible massacre to the GEVO shorts.

To us, however, Friday’s price action oozes of the same signature that preceded a slaughter of the GEVO shorts in Nov. 2013, and again in Apr. 2014.

On Apr. 22, 2014, Gevo reported that it had “come to an agreement with Lufthansa to evaluate Gevo’s renewable jet fuel with the goal of approving Gevo’s alcohol-to-jet fuel (ATJ) for commercial aviation use.”  The news release went on to state that Lufthansa’s testing comes with support of the European Commission, adding gravity and implications to the announcement.

After opening at a price of $0.86, GEVO soared to as high as $1.34 (55.8%) on the Lufthansa news before settling at $1.18, up 31 cents (35.6%).

However, during a four-day period prior to the Lufthansa news, the stock moved up as high as 24 cents to $0.97 from the trading range low of $0.73 (32.8% trading range).

gevo2

There’s little doubt of a leak at some time after the consummation of the two companies, in our opinion.  Therefore, we may assume that another surprise by management my be on the way once again.

“It’s the unanticipated news, masquerading as a ‘Black Swan’ event to the shorts, that troubles my sensibilities of initiating or holding a short position at this time,” said Jason Bond.  “We remember the Apr. 22 Bloomberg announcement regarding Lufthansa, and the pounding the shorts took from that exposure.  Friday’s action and the stock’s relative weakness this summer smells like another Black Swan could be coming for the shorts.”

Editor’s Note: The term and theory, ‘Black Swan’, was coined by famed author Nassim Taleb in his 2007 book, The Black Swan. (not to be confused with the movie of a similar name, ‘Black Swan’.)

Jason’s Takeaway

Novel products introduced by microcaps inherently imply risk – and lots of it.  The bad and the ugly have already been priced-in to GEVO; it’s the potential of another ‘good news’ story coming out of the company that could decimate the relatively large short position in the stock.

According to Nasdaq, the 6.8 million share GEVO short position have reached nearly 31 days to cover.  Friday’s inexplicable double-digit move higher on ‘no news’ appears suspicious and warrants caution.  If previous price action is indicative to the price action we expect in GEVO during the coming next 10 trading days, the large overhang of shorts could provide fuel for a quite dramatic short squeeze on any favorable news from the company.

Looking for another big stock idea like GEVO?

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