What happened
Shares of Renewable Energy Group Inc. (REGI) rose on Monday and were up nearly 12% at 10 a.m. EDT. The main fuel driving up the biofuel and renewable chemical maker is buying ahead of its upcoming inclusion in the S&P SmallCap 600 index.
So what
Last week, S&P Dow Jones announced that Renewable Energy Group would join the S&P SmallCap 600 before the market opened on Tuesday, May 15. Because of that, funds that aim to match that index needed to buy shares of Renewable Energy Group before its inclusion in the index. Those required purchases are driving up the small cap stock today. While there is some prestige the comes with being in the S&P SmallCap 600, that alone doesn't make the company worth 12% more.
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What can make the company more valuable to investors is the performance of its business, which has been doing quite well lately. Earlier this month, Renewable Energy Group posted solid first-quarter results, including reporting $17.5 million of EBITDA in a period where it traditionally operates around breakeven. Meanwhile, the company made solid progress on its ability to grow profits by completing construction of upgrades at its Ralston biorefinery last week. As a result, the company has increased the facility's production capacity from 12 million to 30 million gallons, which positions it "for long-term growth along with the entire biodiesel industry," according to CEO Randy Howard.
Now what
The inclusion in the S&P SmallCap 600 won't create any value for investors over the long term. Because of that, shares could give back today's gains as the market absorbs this temporary demand. However, Renewable Energy Group's prospects are looking brighter, with the company "in a position to deliver solid results in the second quarter based on current market conditions," according to Howard, suggesting that 2018 could be a good year for the company.
