Bankruptcies usually spell the market bottom for a sector not a top. Funny thing, I remember the corn stocks at NYSE on CNBC when Verasun went public. At the time, this one seemed to have the best fundamentals out of all the ethanol stocks. Oh the mighty have fallen. http://biz.yahoo.com/ap/081101/verasun_bankruptcy_protection.html?.v=2
I bought Verasun shares almost two years ago (for exactly the reason that you cited--"this one seemed to have the best fundamentals out of all the ethanol stocks"), but I dumped the shares as soon as it became clear that Verasunâs management is dirty. First, in May 2007, they issued $450,000,000 in Senior Notes without indicating why they needed the funds. At the time, I thought the issue was ridiculous because Verasun already had $287 million cash (see their 10-Q for the quarterly period ended March 31, 2007). However, I decided to wait and see how they would use the proceeds from the issue. I *hoped* that they would expand the distribution side of the company. Then, in August 2007, Verasun acquired three ethanol refineries from ASA Holdings for $675 million. Thatâs approximately $225 million per refinery. At that point, I dumped my shares because the deal smelled bad. The news media enthusiastically described the acquisition as âVerasun setting the bar in the ethanol industry for the purchase price of a refineryâ. What a crock! When Verasun constructed a refinery, the cost was $125 million. Should I believe that Verasun needed to pay a $100 million premium per refinery that they acquire??? What a crock! A short time after the acquisition, Verasun shut down one of the acquired refineries, claiming that âmarket conditions were not rightâ. They buy three refineries. They pay a $100 million premium for each refinery. Then, they shut down one refinery because itâs not needed. Is it possible that such stupid management exists on the face of the Earth? Nah, I say Verasunâs management is dirty. The bankrupcy of Verasun is NOT the result of unfortunate circumstances. It was planned!
Moreover, the problem is not limited to Verasun. Bill Gates bought a large stake in Pacific Ethanol (symbol: PEIX) when the share price was high, many normal shareholders got sucked in by the "Bill Gates" name, then PEIX's share price crashed. Gates sold some shares at the bottom, presumably to make the normal shareholders feel better. Maybe I'm wrong, but I don't think Gates got rich by buying high / selling low. Seems like the finance industry isn't the only industry plagued by unscrupulous behavior.