With just a quick glance, BioFuel Energy Corp. (NASDAQ:BIOF) seems like it should be in dire straits. The company announced it's laying off a big chunk of its production-oriented employees this month, after doing the same at another of its ethanol plants in December. BIOF has been missing loan payments of late too, and has been forced to start using its cash stash to remain in business while it rides out the storm.
The market's pessimism on BIOF, however, has - against the odds - transitioned to optimism over the past eight weeks. In fact, the optimism has firmed up so well, BioFuel Energy Corp. is actually becoming an outright 'buy' at this time.
The chart tells the tale. After going from bad to worse back on December 28th, the stock immediately bounced back the next day. Although it took a few more days for the volatility to dissipate, once it found a footing, BIOF began a long but deliberate upward march. In fact, the effort was so firm, BioFuel Energy shares has fought their way back above all the key moving averages.
Thing is, the rally that began in December actually began back in July; you just have to take a major step back to see it. That's what the chart of BIOF below shows, however... the support line that's been guiding the stock higher since January has actually been guiding it higher since August - things have just been too volatile in the meantime to notice.
Either way, now that BioFuel Energy Corp. is making a convincing bullish move (on rising volume to boot), it's trade-worthy.
Of course, savvy traders will still have one question about the matter: Why? After all, it's not like BIOF has been loading the market up with a lot of good news of late.
One explanation may be that ethanol prices have started to rebound in earnest this year, jumping from $2.17 per gallon at the end of last year to a current price around $2.65. The higher ethanol prices go, the more profitable it becomes. And, the jump from $2.17 to $2.65 is an important one for the industry, as that's the range in which many producers find their break-even point.
Another reason the market's warming up to BioFuel Energy Corp. may stem from the fact that the Environmental Protection Agency recently revamped its renewable fuel mandate, requiring at least 14 million gallons of ethanol to come from cullulosic sources (like wood and grass) in 2013. Though the measure went largely unnoticed by the market, raising the bar on cellulosic ethanol will ramp up the underlying opportunity that is fueling the BIOF business model.
Whatever the reason is, one things is undeniable... the market is warming up to the stock again, and that's enough for a trade right now. There's a lot of ground to make up after a miserable 2012.
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