Pacific Ethanol (NASDAQ:PEIX) has been one of the most successful stocks on the Nasdaq this year. Specializing in the production of alcohol (ethanol) that can be used not just as a fuel additive, but also to create disinfectants and sanitizers, turns out to be a great business to be in in the middle of a virus-spread pandemic. Recognizing that, investors bid Pacific Ethanol shares up five-fold through Wednesday's earnings report.
Then, yesterday, Pacific Ethanol stock crashed. And it crashed again today -- down 6.9% through 11 a.m. EDT. Why?
It's not as if Pacific Ethanol's earnings report wasn't good. It was. Fabulous, in fact.
Despite a big decline in sales overall (probably driven by a decline in demand for automotive fuel), the profitability of ethanol sales in a market starved for alcohol-based disinfectant caused Pacific Ethanol's profits to explode: Its gross profit margin was up more than 10 times to 14.7%, operating and net profits shifted from negative to positive.
Pacific Ethanol stock that was almost never profitable earned $0.27 per diluted share in Q2. So why has the stock sold off twice in two days after earnings?
If you ask me, there are two factors at work here: Profit-taking (because there's a lot of profit that's been made on this stock already), and also fear that profits may be hard to come by in future years.
Investors who guessed rightly that Pacific Ethanol would outperform in Q2 are now reaping their rewards. Investors coming late to this story, however, have to be concerned that a company that profited mightily from demand for its product to fight a pandemic might profit less mightily once the pandemic goes away.
Long term, I think that's a valid concern, but I also think it could be another year or more before this coronavirus thing is licked. With management forecasting at least adjusted EBITDA profits throughout this year, and "momentum continuing into 2021," I suspect that while Q2 was Pacific Ethanol's first profitable quarter in a while, it will not be its last.