REGI, REGI, REGI – Profit Time for this Home Run

The initial part of the headline today was homage to the start of the World Series tonight and for those old enough to remember, Reggie Jackson’s three HR game in the 1977 edition of the Fall Classic.

We will continue our focus from Monday’s Guide on the small cap energy space and top line growth.

Renewable Energy Group, Inc. (NASDAQ – REGI - $12.95) is a firm that produces biodiesel from various feed stocks, including inedible corn oil, used cooking oil, and inedible animal fat; and from virgin vegetable oils, such as soybean oil or canola oil. It is also involved in the purchase and resale of biodiesel and raw material feedstock acquired from third parties; and sale of glycerin, free fatty acids, and other co-products of the biodiesel production process. In addition, the Company offers biodiesel facility management and operational services to biodiesel production facilities and other clean-tech companies, as well as acts as a construction management and general contractor for the construction of biodiesel production facilities.

REGI is up 40% since we featured it in the Market Monitor in early April. We think it is time to take some profit for a few reasons.

First, the U.S. EPA may scale back its requirement for renewable fuel mandates from the 2007 law from 18.15 billion gallons to 15.21 billion gallons overall and specifically a decrease of 0.8 billion gallons of conventional corn based ethanol to 13 billion gallons, and a decrease of 0.55 billion gallons of advanced biofuels to 2.2 billion next year. The proposal was submitted in late August and the agency will need to reach a decision soon. The decreased mandate will no doubt cut top line growth in all biodiesel and biofeul producers like Renewable Energy.

Additionally, the Company is forecast to have a decrease in top line revenue of over 7% from 2013 to 2014. This is before factoring in the change to the mandate mentioned above.

Finally, REGI is very bearish from a technical analysis DMA perspective in all time durations. The stock hit a high of $16.00 the day after Labor Day and appears to have entered a negative momentum cycle since with an overall share price decline on relatively high volume of about half a million shares traded per day.

Renewable Energy Group is expected to release 3Q financial results on Nov 5. Good news here could drive a rebound. Additionally, the EPA may decide to stick to its guns for 2014. We will remain cautiously optimistic and think might be a good idea to take some profit here.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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