Is the ethanol frenzy similar to the .com bubble?

Posted on June 19, 2006 , filed under Stocks | Print This Post

A recent Jim Cramer article has gotten me thinking about the current speculative ethanol frenzy in comparison to the .com bubble of the 90’s.

Here is a quote from a recent Jim Cramer article entitled “Ethanol: Live Fast, Die Young, Take Profits”

Ethanol is in the last stage of a speculative fad’s life cycle. I know this because we see it all the time in these hot sectors.

We saw it with the dot-coms in 1999, with the power merchants in 2000, with the oil service names last year and into this year and with solar power. Now ethanol is following the same pattern.

Ethanol is a commodity much like gold and is now a viable cost to energy efficient alternative to gasoline. I believe there are two key differences between ethanol’s speculative frenzy and that of the .com days that Jim Cramer draws a comparison with.

The first difference is that most of the attention to ethanol has been concentrated in the U.S. During the .com days you could go anywhere in the world and talk about websites and .com ideas that would cause people to get excited. Talk about ethanol with financial professionals in Hong Kong or Shanghai, both relatively sophisticated global economic hubs, and few people will know what you are talking about. In the U.S. ethanol is clearly a buzzword. Globally I don’t believe ethanol has the same type of speculative hype or education among financial professionals found in the U.S. A lack of publicly traded ethanol stocks in emerging markets is also to blame for the lack of interest outside the U.S.

The second difference is that a real business model exists for ethanol. Dot com revenue models were murky but ethanol revenue models are simple to understand. Ethanol has a cost and sale price. Emerging markets will fuel strong interest in ethanol for many years to come. I believe a crash in ethanol stock prices are inevitable, given the speed at which stock prices have been driven up. Long-term I believe a price correction will present the same type of opportunities that the .com crash presented with stocks like Yahoo! Inc. (YHOO), eBay, Inc. (EBAY) and Amazon.com, Inc. (AMZN). I don’t see a crash happening anytime soon. Ethanol interest will remain high as long as crude oil prices stay high. There is too much unrest in the Middle East and fears over a looming war on the scale of World War II for oil prices to dramatically drop.

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