US investment strategists wary of ethanol buzz

By Ellis Mnyandu

NEW YORK (Reuters) - The alternative energy buzz drove ethanol maker VeraSun Energy Corp. VSE.N to a dazzling market debut on Wednesday, but investment strategists are skeptical about the chances to turn a fast buck in an energy form that remains largely a mystery to many Americans.

At least not any time soon.

Speaking at the Reuters Investment Outlook Summit in New York, strategists said if crude oil prices were to slump, the wild bets that investors have put on ethanol's future could breed the kind of pain that stung Wall Street when the Internet bubble burst in 2000.

"There's a substantial amount of risk there," said Ed Keon, chief investment strategist at Prudential Equity Group.

"There was a time when all kinds of alternative energy sources looked like the great next thing and then oil prices came down. It's very hard to say what the investment potential in some of those things will be," he told the summit.

Made primarily from corn and sugar cane, ethanol is blended with gasoline, helping to reduce emissions and petroleum usage.

Since President George W. Bush's call for the United States to end its "addiction" to foreign oil in his State of the Union address earlier this year, ethanol or ethyl alcohol has become the talk of the market as investors look for new areas to put their cash.

Soaring crude oil prices have also helped fuel the buzz, which has sent even smaller ethanol stocks into a frenzy.

Year-to-date, shares of California's Pacific Ethanol Inc. (PEIX.O: Quote, Profile, Research, Stock Buzz), which counts Bill Gates, the world's richest man and chairman of Microsoft Corp. (MSFT.O: Quote, Profile, Research, Stock Buzz), among its investors, have more than doubled.

Meanwhile shares of Archer Daniels Midland Co. (ADM.N: Quote, Profile, Research, Stock Buzz), the largest U.S. ethanol producer ahead of VeraSun, are up 57 percent, compared with a 2.9 percent gain in the shares of Exxon Mobil Corp. (XOM.N: Quote, Profile, Research, Stock Buzz), the world's largest publicly traded oil company.

VeraSun's market debut on Wednesday marked one the year's best performing initial public offering, according to analysts. But just as the stocks tied to ethanol have soared sky-high, so would expectations for the companies to deliver real returns.

Strategists said ethanol was largely an untried energy form which could spell some disappointment if crude oil prices were to fall back sharply from their current level of about $70 a barrel. And with global commodity prices swinging wildly amid fears about a potential slowdown in economic growth, the risks could prove even greater.

"According to some studies ethanol is very inefficient to produce. It costs you more to produce than you actually get," said Tobias Levkovich, Citigroup's chief U.S. equity strategist.

"(Ethanol) gets sexy again when you have higher energy prices. These are hot stories at any point in time. They (become a) fetish, and if I see lots and lots of stories written about it, it scares the heck out of me."