'Gaping Holes' at Xethanol
By Melissa Davis
Senior Writer
8/17/2006 9:22 AM EDT
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Celebrity stock picker Tobin Smith has made quite a choice in the alternative-energy field.
In his ChangeWave Investing newsletter, the Fox News regular and bestselling author has recommended that his followers buy Xethanol (XNL - commentary - Cramer's Take). The company, which last year went public through a reverse merger with a small pottery outfit, has big dreams of transforming unwanted waste into ethanol.
Smith likes Xethanol because it stands out as one of few pure-play investments in this promising, if unproven, niche. The ethanol craze has already enjoyed a good run in the market, briefly propelling shares of little-known companies such as Maumee, Ohio, grain processor The Andersons (ANDE - commentary - Cramer's Take) to stratospheric heights this past spring.
Smith likes Xethanol so much, in fact, that he completely dismisses a detailed report by sharesleuth.com that raises questions about everything from management's credentials to the company's idled ethanol plant in small-town Iowa.
Smith offered to help Xethanol set the record straight as well.
"Listen, ever since we were notified on this misguided (at best) attack on Xethanol, I have been working with management and others to rebut the incredibly inaccurate slam job done by sharesleuth.com on XNL," Smith wrote on his ChangeWave.com blog last week. "I will have more to report tomorrow, as I will be in New York City (God willing) and will do everything I can to get additional data out of the company."
Smith failed to respond to an email from TheStreet.com seeking an interview for this story.
Perhaps he ran into trouble finding someone willing to talk to him at Xethanol's new corporate headquarters in New York, since the promised update never appeared on his Web site. TheStreet.com sure hit a brick wall. Xethanol refused to arrange an interview that would have allowed corporate executives to present their side of the story. The company instead stood by an eight-paragraph press release that, while adamant in tone, fails to specifically address many issues in the long sharesleuth.com report.
Meanwhile, controversy over the stock continues to rage.
Fans still love Xethanol because, based on its press releases and regulatory filings, the company could soon become the first big player in the so-called biomass-to-ethanol business. But skeptics wonder.
At least one Xethanol holder, private investigator Michael Ferrari of Pleasanton, Calif., counts himself among the doubters. Ferrari says he was hired by an elderly woman who bought the stock and then grew concerned about the company. He purchased some of the stock from her and then bought put options -- which become valuable if the stock falls -- to limit his exposure.
"I'm sure you have heard the investigator credo: 'A coincidence is just a coincidence, until there are too many coincidences,'" Ferrari says. "In my 21-year career, this is the longest string of coincidences I have ever encountered or studied."
Xethanol's stock, which fetched more than $15 a share at its peak, tumbled 6.2% to $4.66 on Wednesday.
'Key Employees'
At this point, sharesleuth.com has already raised a number of troubling questions.
Perhaps most notably, the blog found no evidence supporting Xethanol's claims that its CEO held executive positions at the big-name corporations listed in his official bio. Nor could it find any reason to believe that Xethanol will be turning waste into ethanol by next year, as it promises. After all, bigger players like the federal government are still struggling to do so, and one of Xethanol's two ethanol plants remains idled.
TheStreet.com recently set out to learn more about Xethanol's business operations and the plant managers who supposedly run them.
Aside from named executives, Xethanol lists two "key employees" in regulatory filings. The first is James Stewart, a corporate vice president who runs the one company plant that actually operates. Based on that filing, Stewart "has more than 23 years of experience in ethanol production in the United States and throughout the world."
But the Business Record, a local publication in Iowa, has painted Stewart as a regular sort of guy. The article says that Stewart, a cattle producer by trade, hatched the idea for a farmer-owned ethanol plant after viewing a government video in the mid-1990s. In the interview, Stewart told the newspaper that farmers got interested in the idea -- and pitched in $5,000 worth of corn each to invest -- while "speaking the entire time with a toothpick protruding from his mouth."
The plant ran into trouble and shut down a couple of years after that story appeared. In 2004, The Gazette of Cedar Rapids reported the bank finally sold the plant at auction to Xethanol -- the only bidder -- for a bit more than its $5.3 million asking price.
Today, that corn-based ethanol plant serves as Xethanol's only source of operating revenue. Based on its regulatory filings, the company last year generated $4.34 million in sales -- enough to cover the $3.3 million spent on setting up a new corporate headquarters, but very little else. The company ended the year $11.4 million in the red.
Idled Plants
Xethanol's other ethanol plant -- described by sharesleuth.com as dark, empty and "in obvious disrepair" -- reportedly has no utilities, let alone a manager or staff. So it remains unclear exactly what the company's second "key employee" does.
In its regulatory filings, Xethanol lists David Kreitzer as its vice president of business development. The company says that Kreitzer "has worked in every area of ethanol production" and highlights his role as past president of Gopher State Ethanol in particular.
As recently as May, Kreitzer seemed to still be in charge of that company. An article published by the Star-Tribune of St. Paul, Minn., specifically names Kreitzer as the property manager of Gopher State Ethanol -- a bankrupt ethanol plant that once operated inside a historic brewery. The plant shut down in 2004, the Star-Tribune reported, after nearby residents sued over its noise and smell. Those neighbors seem unhappy with the facility still.
"Neighbors became worried when they saw gaping holes in several buildings after the owners removed pieces of equipment," the Star-Tribune reported in May. "Kreitzer said that some of the 'openings' were pre-existing, and that he isn't inclined to alter 'the historic portions of the property.'"
Based on his testimony before the St. Paul City Council, Kreitzer seems to be hunting for a buyer instead. And Xethanol, with one plant still running on corn and the other not running at all, has made clear that it's in the market to pick up a few more facilities.
Stock Advice
Xethanol finances its endeavors with money raised through stock offerings.
The company sold $34 million worth of stock in April, with Goldman Sachs snatching up $4 million worth for itself. Smith clearly thinks that regular investors should pile into the stock as well. He continues to recommend buying the shares -- and potentially holding on to them for quite some time.
"I am reiterating our strong buy (rating) under $8 here for your legacy portfolio," Smith wrote last week. "And to help remove the stock from short-selling inventory, I'm recommending putting a 'good-till-canceled' sell order for $30 on the shares you hold."
Smith doesn't seem to follow his own advice, however. Based on his disclosures, he personally owns none of the stock himself. |
