Rarely do shares rise nearly three-fold unless they are IPOs or nano-cap stocks. So after Gevo, Inc. (NASDAQ:GEVO) soared a monstrous 260% on June 18, investors should ask why before buying.
Yesterday, Gevo won the EPA’s approval for the use of isobutanol at a 16% blend level in gasoline — an increase from the previously approved level of 12.5% .
Previously, 16% blend levels of isobutanol were allowed only for off-road applications and boats. Allowing its on-road use will lead to significantly stronger revenues for Gevo. The company has developed the isobutanol containing gasoline for various markets, also known as the “ethanol free” segment.
The approval of Gevo’s 16% blend level follows last week’s EPA’s registration of isobutanol for blending into gasoline. All in all, this is a welcome change for GEVO stock, which traded in the $12 – $14 range last year in September 2017 but has declined steadily since then.
GEVO Stock Is Still Risky
Investors should note that Gevo reverse split its stock 1-for-20 on June 1 to avoid getting de-listed on the stock exchange. This cut the number of shares outstanding from 25.8 million shares to just ~ 1.3 million shares.
The lower liquidity will most certainly lead to stock price volatility, with today’s massive rally a consequence of this move.
Besides, with just one lone analyst (Editor’s Note: Partial paywall) covering Gevo on Wall Street, any news will move the share price by a wide margin. On Tipranks, analyst Amit Dayal is ranked just one star, due to his 36 percent success rate and a negative 2.4 percent return over the last two years.
Due to the steady decline in Gevo, Dayal’s 10 calls on the stock (eight as “buy” and two as “hold”), his success rate is zero, with an average return of negative 15.3 percent (loss).
Gevo’s $16 million market cap is another red flag for conservative investors. Any news may move this nanocap stock up or down.
By comparison, Gevo’s competitors sport reasonable P/E multiples in the 11.1 times to 34.4 times range:
SimplyWall.St has no price target on the stock due to unavailable cash flow data. But the site recognizes that the company is able to meet its short-term (1 year) commitments with its cash and short-term assets on hand.
BP plc (ADR) (NYSE:BP) may better suit the value investors who wish to avoid volatility. The vertically integrated firm pays its shareholders a dividend yielding 5.29 percent. BP recently topped around $48 a share because its share price moves alongside that of the oil prices. The rally in oil this year gave BP stock a 26 percent lift.
Valero Energy Corporation (NYSE:VLO) is an even better value idea because its P/E is 21.6, compared to 28.6 for BP. The oil and gas refining and marketing firm also trades at a 0.60x PEG ratio. So, compared to Gevo, which may end up being a “one-hit wonder,” Valero does not need a sustainable biofuel market to meet its 34 percent EPS growth estimates for next year.
The Bottom Line for GEVO Stock
Gevo’s beautiful rally on June 18 may lure speculators, which may push the stock higher still. Management could issues shares to capitalize on the stock’s appreciation. But that move would ultimately put an end to the bounce. Conversely, market traders may book profits on the stock, pushing Gevo stock back to the pre-rally share price of around $4.00.
Disclosure: Author owns shares of BP plc.
