Friday, April 16, 2010

Why Goldman is a Screaming Buy

The SEC shocked Wall Street today with its accusation, duly filed in Federal District Court in Manhattan, that Goldman Sachs (NYSE: GS) engaged in fraud during the subprime debacle.

Shares have taken a dive, losing nearly -13% of their value on fantastic volume.

So the question arise: Is Goldman a buy? Or is it lights out for the storied squid?

The answer isn't hard to find. Read the lawsuit. When you're done, I think you ought to respond to your first instinct. (More on that in a minute)

First, stick with me as we break this down piece by piece.

It starts with a home buyer getting a mortgage. The bank, for whatever reason, sells the loan. This happens thousands of times a day.

Those loans are combined into an entity called a "Residential Mortgage Backed Security." This is nothing more than a bond backed by mortgages. Each month, as borrowers make the house payment, a lot of interest is paid and a little debt is retired.

Those residential mortgage-backed securities can be packaged into yet another type of security called a "collateralized debt obligation." To make sure it's even more complicated, these are further divided into sections called "tranches" and are then risk-rated and sold. So now it's a big bond backed by a bunch of smaller bonds.

Let's be clear about who snaps these up. These investments are only bought by major players who are looking for good returns and willing to take the risk to get them. "Qualified institutional buyers" are legally recognized as sophisticated, well informed investors who need less protection than individuals.

Now: Enter Goldman.

The investment bank was asked by a client to put together a CDO. So Goldman did. It loaded a lot of risky residential mortgage-backed securities into a shiny new CDO and then sold pieces of it to investors. Just like it has done a thousand times before. Just like the other major investment banks do all the time. Goldman was paid a fee of $15 million to put the CDO together. For those of you keeping score at home, that's about 0.0003% of its annual revenue.

What happened? Well, as we all know, the housing market went south. As properties lost value, borrowers defaulted with insufficient collateral to cover the debt. The mortgages lost some if not all of their value, and the over-arching CDOs basically became worthless because no one wanted to buy "toxic assets."

Here's the thing, though. While millions of investors lost and some institutions even failed, a few investors did manage to make money on the subprime collapse.

One who did: The client that asked Goldman to put together the CDO. It was a hedge fund called Paulson & Co. After the CDO it sought had hit the Street, Paulson bet against it by buying something called a credit-default swap.

Forgive the lingo, but there's no way around it. A "credit-default swap" is nothing more than a bet between rich dudes. One says something is going to happen and the other says it's not. It's kind of like a private insurance policy. Instead of going to, say, Geico, I pay a rich neighbor $1,000 to cover me for a year. If my car crashes, he buys me a new one. What's "swapped" is risk. I was taking it, then I paid someone else, my rich buddy, to shoulder the burden.

In the Goldman case, the something being bet on was the mortgages. Some bet on them, some bet against them. In banker lingo, a "credit" is a loan. "Default" refers to the risk that a loan might go bad. So all a fancy "derivative" like a credit default swap really is is an insurance policy against a bunch of loans going bad.

That's what Paulson bought. When the loans went bad, Paulson collected on its default swaps.

Not quite as complicated as it sounds in the papers, right?

Paulson made $1 billion on this deal, incidentally. That money came from the rich dudes who thought the mortgages wouldn't go bad. (And if they had, then they would have just kept the premium, just like the insurance company keeps the premium even if you don't wreck your car.)

Paulson, for its part, is not being sued by the SEC.

Only Goldman. And a (now) 31-year-old kid who works there. He made the mistake of writing a couple of damning-sounding emails in which his ego-driven braggadocio far superceded his prudence and intelligence. He knew, as most did at the time, that the mortgage market was imploding and that CDOs were about to take a hit. He said so. And Goldman was still selling these. And institutions hungry for rich returns were still buying them.

Remember: Every one of these CDOs, even, in some cases, with extremely poor credit ratings, were sold. Someone bought them. Someone read the details, took out his checkbook and said, "I will pay for that." And everyone who did, none with a gun to his head, was a qualified institutional buyer who knew exactly what was going on.

The SEC contends that Goldman has some sort of duty to disclose that Paulson was betting against the CDO.

That's nuts.

Goldman should never tell anyone what one of its clients is doing. It doesn't and, I would guess, it hasn't. In other forms, exploiting or divulging clients' positions would be no different from front-running trades, which is and should be illegal.

Remember: Goldman is a broker/dealer. It arranges trades. A buyer wants something that a seller does not, Goldman puts the two parties together. It's not Goldman's role to talk a client out of buying something that it wants. Goldman's role, in this case, was to make a market. Provide the means for transaction between buyer and seller. It did that. It did nothing wrong.

Look at it this way: What if you called your broker and sold 100 shares of IBM. Would you want your broker to tell the world that you no longer wanted to own Big Blue? And if you shorted the shares, does your broker have an obligation to tell the next customer that wants to buy IBM that you just bet against the company?

Of course not.

And, again, we're not talking about the individual investors that the SEC is supposed to protect. We're talking about sophisticated, well informed masters of finance who knew exactly what they were doing. It's ludicrous to suggest otherwise. That a lot of banks lost money on CDOs just means they were all equally stupid and willfully disregarded the risk.

I mean, c'mon: No one buys a debt instrument with a relatively high rate of default (as reflected in credit ratings and in the underlying fundamentals of the instrument, which are available in detail on any Bloomberg terminal) without understanding that somewhere someone might be betting against it. That's just life. Even the best companies have contrarians who bet against them.

As rumors build against shakier companies, of course, investors short it -- betting it will implode. Others buy it, thinking it will make a comeback and they will make a killing.

There isn't any wrongdoing, even if both parties make their trades though the firm that underwrote the initial offering!

The broader context must be taken into account. Goldman Sachs is a great bank. Smart, admirable and decent people work there. They make good salaries, sure. But that just gives every Goldman employee all the more reason to play it straight.

Goldman does complicated stuff and makes a ton of money in ways that most people can't relate to or figure out. They hear words like "derivatives" and "credit default swap" and "collateralized debt obligation" and they're lost. Most people wonder how the housing bubble burst and how everything really went down, and in the end it's easy to blame an institution like Goldman or Skull & Bones or the Castro regime for things that otherwise defy an easy explanation.

The same people who would be mad at Goldman for selling this security at the behest of a client are the same ones who thought the whole financial crisis would go away if we lowered a few CEO salaries. It is naive populism knee-jerking its way to judgment about something it clearly is ignorant of and has no frame of reference to understand.

This lawsuit is about redistributing wealth. It's about criminalizing financial sophistication and punishing size and success.

That's the bad news.

The good news is that the Goldman case will be tried in the most financially savvy court in the land. The truth will come out. Mark my words: Goldman will be fine.

So what's your first reaction?

If it's to buy Goldman shares at today's fire-sale price, then I'd agree. Goldman's a buy.

Two Positions Harvard Should Increase

Harvard Management Co. has 120 securities in its publicly disclosed portfolio. Its top four holdings, representing 55% of the portfolio's $2.3 billion value, are internationally oriented exchange-traded funds that focus on generating income in emerging markets, China, Brazil and South Korea, respectively.

Given Harvard's clear preference for managing its risk through the diversity afforded by ETFs, I wanted to know which stocks the nation's wealthiest university endowment was holding.

Seven equities comprise at least 1% of the portfolio as of its most recent filing. None are in the same industry, all except one has a multibillion-dollar market cap; most are megacaps valued at more than $40 billion. Three of the companies -- BJ Services, Burlington Northern Santa Fe and Marvel Entertainment -- have since been acquired.

Here are the companies Harvard owns, what the university is betting on, and my take on the investment’s prospects:

The largest stock holding is Barclays (NYSE: BCS). This British bank has seen decent returns since Jan. 1, with a better than +27% gain, and a one-year return of more than +100%. Even so, the bank has lost nearly 50% of its value during the past five years as the global financial system weathered the Great Recession. Investors are still unwilling to pay much for bank assets, which isn't so surprising when you look at the strength of the asset pool that required 8.0 billion pounds in loss provisions in 2009 and 5.4 billion pounds the year before. Investors are only willing to pay 88 pence on the pound for assets, which effectively values the bank's underlying business at zero.

As Barclays and other banks earn their way out of the bad loans they made, their earnings will inevitably rise, as the cash they were allocating to problem loans will flow instead to the bottom line. It's a waiting game. Harvard should keep at it. I'd hold this position.

Teva Pharmaceutical Industries (Nasdaq: TEVA) is an Israeli drug maker that specializes in generics. Sales, earnings and book value have grown every year since 2000. The shares currently command 27 times earnings, a discount to its historical average of about 40. Future profits should be significantly enhanced by a recent acquisition of a German drug maker and by a spate of expiring U.S. patents.

Owning Teva is a bet on cost-conscious consumers in the health-care sector, an economic segment that tends to grow faster than overall U.S. gross domestic product. As recent health-care legislation extends coverage to previously uninsured patients, drugs sales are likely to see an increase. The wager has been a good one so far. Teva has outpaced the S&P this year (Teva +11.4%, the S&P +7.0%) and the company has posted annualized returns of +14.3% for the past five years.

Harvard would do well to increase this position.

BJ Services (NYSE: BJS) is an oilfield-services company, and owning it signifies a belief that drilling activity around the world will remain strong. As oil prices creep closer to the triple digits and each day seems to bring another announcement of a new crude discovery, that appears to be a good bet. The company was recently acquired by Baker Hughes (NYSE: BHI), which trades near its 52-week high at a robust 35 times earnings, a richer valuation than Google.

Baker Hughes is a storied company, and Wall Street likes the story. That's why its valuation has risen to historic highs even despite lackluster 2009 results and ho-hum forecasts for 2010. The longer-term prospects look good, but the company offers a less-than-compelling entry point at these prices.

I see more potential value in offshore players like Transocean (NYSE: RIG), Noble Energy (NYSE: NE) and Diamond Offshore (NYSE: DO), especially as the Obama administration has opened up previously protected U.S. waters for exploration.

Harvard should have some individual-equity exposure to the petroleum sector, but Baker Hughes has limited upside. The offshore drillers are far more promising opportunities: Why buy a company at an inflated price hoping its earnings will rise to lower its earnings multiple when you can buy a company with similar growth prospects but a depressed valuation?

Harvard should close this position.

News Corp. (Nasdaq: NWS) Rupert Murdoch's media empire has about $30 billion a year in annual revenue, but its run of robust profits came to an end in 2009 when it posted a $5.6 billion loss. Yet even those earlier profits haven't done much for the stock, which has achieved an annualized gain of +0.7% in the past five years and an appalling -10.7% annualized loss during the past three years.

Though News Corp. produces news and entertainment, it is primarily in the highly cyclical advertising business. Its recent track record has been rocky, with 2009 earnings coming in below 2008, and its future doesn't look great, with 2010 earnings forecast to come in under 2009's. So the fact that News Corp. is trading at 24 times trailing twelve-month earnings per share of $0.75 is curious. That's higher than the S&P 500, which, as a whole, should be able to grow faster than a $40 billion media company. Its valuation also exceeds the company's five-year average earnings multiple of 18.

Here's the rub: If a company's earnings are worth more than the broader market, then its assets ought to be, too. After all, the premium to book value represents the market's valuation of the business that's going to create those future earnings. But that's not the case. News Corp. trades at 1.9 times its net asset value, a discount to the broader market's 2.2. So News Corp. either needs to somehow erode shareholder equity to lower its book value (unlikely), or it needs to seriously juice its earnings. An increase in earnings, however, is already pretty much priced in.

There's current upside to News Corp. Harvard should close this position.

Pebblebrook Hotel Trust (NYSE: PEB) is an anomaly in Harvard's portfolio. It's a small real estate investment trust as opposed to a large international corporation. It went public in December 2009 and has so far only managed to post a small loss. The REIT received proceeds of nearly $400 million that it plans to "opportunistically" invest in the beaten-down hotel sector, which suffered a -16.7% decline in revenue per available room in 2009, one of the worst years for the industry.

Any wager on hotels is clearly a bet on a strong economic recovery where businesses aren't afraid to spend money on travel and consumers become less discount-focused when booking rooms for vacations. This is an income play that has, of yet, produced no income. Better, more established yields are available.

The last two stocks that made the list are Marvel Entertainment, which was acquired by Disney (NYSE: DIS), and Burlington Northern Santa Fe, the railroad, which Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) bought. After approval by BNI shareholders -- with 70% voting in favor of the $26.4 billion deal -- Berkshire said 40% of Burlington shareholders wanted to be paid in cash and 43% wanted Berkshire stock.

Which leaves one final question on this exam.

Will the smartest university join forces with the world's smartest investor?

To be sure, Harvard got it wrong the first time. The university turned Buffett down flat when he applied to its graduate business school in 1950. If Harvard wants to see serious returns on its assets, however, then it might want to rethink that decision. After all, its investment managers achieved a stunning -27.3% loss on their portfolio in the fiscal year ended June 30, 2009, while Mr. Buffett, who, despite his Columbia MBA, ended 2009 with a +19.8% gain in Berkshire's book value.

The long-term picture is even better with Buffett: He has delivered a +20.3% annualized return vs. Harvard's +11.7% annualized growth, which roughly matches the market.

Here's the crib sheet for the exam: You have to generate some returns in excess of market gain if you're ever going to get ahead. Let's check the numbers: Invest $100 million with Buffett and you'll end up with $4 billion after 20 years. Invest with Harvard and you'll arrive at a $914 million balance during the same time period, less than 25% of what Buffett earned.

Let's hope Harvard got it right this time and took the shares instead of cash. We’ll find out in about a month, when the next filing is due. The cash would have earned nothing, but Berkshire has returned +22.1% year-to-date.

More of the Web's best invesmtn commentary can be found at www.streetauthority.com.

Thursday, April 1, 2010

How Obama Instantly Created $2.2 Billion in Investor Wealth

With a stroke of his pen -- and after a hellacious fight with the Congress -- President Obama brought massive change to the health-care industry.
He's doing the same with another industry today. The industry is different and he doesn't need Congressional approval. And the plan has already created $2.2 billion in wealth for investors.

So what's going on?

Would you be surprised if I told you it was politics?

Presidential power, some would argue, is cumulative. It builds. Winning presidents tend to keep on winning; losing presidents tend to keep on losing. After more than a year in office, the verdict on whether Mr. Obama will turn out to be a perpetual winner like FDR or a chronic loser like Jimmy Carter has yet to be determined.

Making such predictions is dinner-table sport inside the Beltway. Everyone has an opinion these days, but even the cagiest political operators should be loathe to make too bold a forecast. Today's supercharged political climate is full of surprises.

The fact is no one knows how the Obama administration ultimately will be judged.

But I can tell you what's coming next. As you know, health care was a cornerstone of the president's agenda. With the bill signed, Mr. Obama is wasting no time. He took a quick victory lap to Afghanistan to change the focus, came back and met with the French president for the same reason, and now he's ready for a new storyline.

He's got it. If you saw the news yesterday you know what it is.

Mr. Obama is clearly moving on to another key element of vision: The environment.

We've all heard stories about how smart Mr. Obama is. And though the president is undoubtedly very intelligent -- and calmly disciplined -- both of those labels undersell him. In addition to his brain power and temperament, Mr. Obama is also very shrewd.

You see, though I would suspect he would agree that presidential power is cumulative, I think he also knows he can't just ram through another bill without any support from the other side of the aisle. That's not a purely political calculation, it's bowing to the unavoidable reality that Senate rules don't allow for another reconciliation process this year.

But with the midterm elections coming up, it's unlikely that the White House would railroad through more legislation even if the option were available. Mr. Obama and his advisers know that if you engage your enemy in the same way too long, he will adapt to your tactics. So the president is switching gears. That's why he's been talking about bipartisanship again, going so far as to quote the old Ronald Reagan line about "disagreeing agreeably." It's also why he's been supporting the construction of new nuclear power plants, a key Republican energy priority. The fact is Mr. Obama is priming the political pump.

And what's going to come through the pump next?

Crude.

The President is flip-flopping on a longstanding policy and opening up nearly 300 million acres -- or about 480,000 square miles -- for offshore oil exploration, some of it for the first time.

The action added at least $1.5 billion in market value to the offshore drilling industry's major players. President George W. Bush might have been an oilman -- and, to be fair, he did try to open up some areas for drilling -- but it's Barack Obama who today snapped his fingers and added nearly $1 billion in market cap to Transocean (NYSE: RIG), the leading offshore drilling company.

The president didn't stop with offshore drilling. To placate supporters who are bound to be aghast at the drilling, he threw environmentalists a bone and announced he will also increase the military's use of biofuels and add hybrid vehicles to the government's fleet. He made his announcement in front of a fighter jet that will run on biofuel -- not because that was the most important part of the announcement (it wasn't) but because he wanted a better visual on the news than offshore oil platforms, which would incense Greens.

Investors who own offshore drillers should hang on to them. And all growth-oriented investors should consider them: Offshore drillers are trading at very low valuations -- Noble Corp. (NYSE: NE) sells for 6.5 times earnings; Transocean for 7.3. Diamond Offshore (NYSE: DO) for 9.0. Part of that is uncertainty: No one knew what the Administration was going to do, especially after Mr. Obama said in his State of the Union address that some hard choices about drilling were going to have to be made. Now that those decisions have been made, all three of those industry-leading companies are steals. That's not just because of their long-term prospects but also because of their recent performance.

Transocean, for example, which operates 138 mobile offshore drilling rigs, grew its earnings from $0.22 a share in 2003 to an astonishing $12.48 last year, a gain of +5,572.7%. That's reflected in its historical earnings multiple, which is more than 40 times earnings for the past five years. That kind of earnings growth is possible again. The shares are up nearly +47% in the past year. Diamond Offshore has had similarly strong earnings growth, with an average price-to-earnings ratio (P/E) of more than 30 during the past five years.

Noble has had the most measured results, posting good steady growth, and should be able to regain its typical valuation of about 17 times earnings. Even before the president's landmark announcement today, Noble was worth $108 a share based on its current earnings. That's +157% upside even before new business juices earnings in the years to come.

Investors should and must go into the oil patch with their eyes wide open. First, oil investors have to be comfortable with volatility -- there isn't a "safe" place to stand anywhere in the industry, which is subject to every kind of risk actuaries calculate, and then some. That's not to say there aren't great petroleum investments -- in fact, no sector has ever achieved a better return on equity than the oil business -- but understanding the risk is the first step toward understanding whether any investment is suitable for your portfolio.

Second, even though the president reversed the moratorium instantaneously, the returns are going to take time. The intricate offshore survey work required to find suitable exploration sites will take months and years.

For risk-tolerant investors looking to take advantage of Mr. Obama's bold new energy direction, the offshore drilling space is a great place to seek growth. The president has added billions to this sector today. It's likely just the beginning.

More of the Webs best investment commentary can be found at StreetAuthority.com

Tuesday, March 16, 2010

Turning $25,000 into $3.2 Million

This week Wall Street has had a lot of its usual fare to digest: Retail sales, housing starts, petroleum inventories, mortgage applications, some minor earnings reports. Those data points are important enough to keep track of, but none is likely to move the market.

What could? Well, some would argue that the most important thing on the calendar will be today's interest-rate announcement from the Federal Reserve.

But I would argue differently.

I don't think the most important thing for U.S. investors is happening in these United States.

I think it's happening in Amsterdam.

The World Biofuels Markets conference will draw more than a thousand of the foremost experts together for three days ending Wednesday in The Netherlands. Nearly 300 speakers will talk about the industry's latest developments.

This isn't some ho-hum annual confab of the Midwestern Regional Widget Alliance going on at some down-market Vegas venue presided over by Wayne Newton. Rather, the World Biofuels Markets conference is a meeting of the men and women who are inventing a new industry, who are using cutting-edge science to harness new forms of energy that could not only reduce the world's dependence on OPEC but that could help reduce harmful pollutants while opening new markets and creating scores of thousands of jobs.

Among the sponsors: Petroleum giant and clean energy pioneer BP (NYSE: BP), as well as agricultural titan Archer Daniels Midland (NYSE: ADM) and the European Commission's Directorate-General for Energy & Transport.

The guy I want to hear most: Dyadic International (OTC: DYAI.PK) CEO Mark Emalfarb.

Dyadic is a leading enzyme company whose technology is vital to the white-hot cellulosic ethanol industry. Cellulose is a type of sugar found in all plants that can, with the help of special enzymes, be turned into ethyl alcohol -- ethanol -- which can be blended with gasoline and used as a motor fuel.

U.S. federal law codifies the nation's output targets for renewable fuels. For instance, the timetable, which covers 2008 through 2022, calls for 12 billion gallons of traditional corn-based ethanol this year. That slowly ratchets up +25%, to 15 billion gallons, in 2015. But that's the ceiling.

Now, a lot of businesses would be pretty happy to have +25% growth built into federal law. But the upside is much higher for cellulosic ethanol. The output target for 2010 is 6.5 million gallons. But there is no ceiling. The timetable continually increased the cellulosic target through 2022, when it will stand at 16 billion gallons. That's not +25% growth spread over five years. That's more than +90% annual growth during each of the next 12 years.

There is nothing out there with similar long-term growth prospects. And this growth is written into federal law.

Investors who back the right companies could well see similar returns in their portfolios. I don’t want to gloss over what that means. A +50% rate of return over a dozen years turns $25,000 into $3.2 million. A +91.7% growth rate -- the actual compound annual growth rate built into the output timetable -- turns $25,000 into $61 million.

Do I really think that's likely? No. I'd be a fool to seriously suggest it's even possible to turn $25,000 into $61 million -- that violates the law of large numbers. But even if I'm off by an order of magnitude this investment still has more upside than anything else.

Dyadic has gained nearly +200% since I first added it to the Government-Driven Investing Portfolio. I think it and a handful of other cellulosic ethanol companies have the potential for strong triple- and double-digit returns for the long-term.

Here's why:

1. Dyadic's Emalfarb has already signed deals with some of the world's largest ethanol players.
Spanish conglomerate Abengoa, for instance, is a Dyadic customer. And Royal Dutch Shell (NYSE: RDS-B) just cut a $12 billion ethanol deal with Brazil's Cosan (NYSE: CZZ). Shell has an interest in an entity called Codexis that will be part of the Cosan venture. Codexis also uses Dyadic's technology. In fact, Codexis said in an SEC filing that one of the risks it faces is losing its access to that Dyadic technology, which would have a material impact on its ability to continue its business.

Let's face it: Big companies like Abengoa and Shell don't mess around with penny-ante companies that can only talk about how great the future will be. They instead partner up with serious vendors that can deliver results and actually make the future happen. Dyadic is one such company. I expect more big deals.

2. Dyadic never limits its ability to make money.

Emalfarb doesn't have any inclination to let any customer have control of his technology. If Company A wants to rent it -- that is, pay a royalty on its use -- that's fine, but Emalfarb retains the right to license Dyadic's enzymes to anyone willing to pay for them. Dyadic's deals are nonexclusive, and that is one reason the potential for the shares is so high. It is possible that the company could receive a royalty on a significant percentage of the cellulosic ethanol that the world produces. There's no ceiling and Emalfarb has wisely chosen not to build one and limit his company's ability to make money.

3. The company focuses on its core competencies.

Emalfarb has no intention of burning through Dyadic's cash by building company-owned cellulosic ethanol plants. Why deploy scores of millions of dollars to build the plants when he can derive a significant income stream from them without committing a dime? Emalfarb is a compelling CEO because he has faith in his company's products and in his ability to develop more. He's not evenly remotely interested in expanding into areas he doesn’t know anything about. The company knows enzymes and monetizing those products is its core competency. That is Emalfarb's laser-like focus. He'll deliver the enzymes. Someone else can write the check to build the plants.

Dyadic is a clear leader in two areas: It's showing the world how to make cellulosic ethanol and meet the U.S. government's ambitious targets for its production. But Emalfarb is also showing the world the smart way to run a company. His shareholders have been handsomely rewarded, and I think they will continue to be.

Emalfarb presents at the biofuel conference Wednesday. I'll be listening then. Today, however, I'm buying more Dyadic shares.

Disclosure: Long Dyadic.

Monday, March 15, 2010

Advice I Give Rich Friends

Say you and I are friends.

And let's further assume you're fabulously wealthy.

You've come to me for advice. What would I tell you to do with your money?

I'd tell you to do three things.

The first: Buy farmland.

Sounds nuts, I know. Farming is technical, labor intensive, highly risky and remarkably capital intensive. But mark my words: Agricultural economics are going to undergo a sea change in the next 20 years.

The reason: Biofuel.

Right now, "biofuel" means corn-based ethanol. That's changing -- fast. Chemists and biologists are engineering what will amount to no less than an agricultural revolution.

They've figured out how to unlock the sugar found in all plant material and turn it into motor fuel.

That means it's now possible for the United States, long dependent on sometimes hostile and always volatile foreign powers, to grow its fuel rather than to buy it for cash. Dozens of pilot-scale projects have been built, and thousands of commercial-scale biorefineries will spring up across the nation and use plant waste -- corn cobs, rice straw, corn stalks, wood scraps and so on -- as feed stocks to create cellulosic ethanol. Federal timetables call for 16 billion gallons a year by 2022, up from 6.5 million today.

The result of this will be a massive upward revaluation of cropland that accompanies a huge uptrend in the land's ability to generate returns.

This will be Norman Borlaug (the American Nobel laureate known as the father of the Green Revolution) to the fifth power. It will also foster an urban exodus, as families return to the nation's small towns to take advantage of good wages and high quality of life. Owning farmland is a great way to play the inevitable and irreversible trend toward biofuel.

(If you're not ready to make a seven-figure commitment to a parcel of ground in, say, Lincoln County, Kansas -- where I'm from -- then you need to own shares of the biotech company that makes the enzymes that enable the biochemistry behind cellulosic ethanol. That company, Dyadic International (OTC: DYAI), has already delivered a triple-digit gain to readers of my exclusive Government-Driven Investing newsletter. I think it's just getting started!)

The second thing I'd tell you to do with your fortune: Get your hands on the hottest commodity in the world.

It ain't gold. It's not silver. It's not even uranium. It's lithium.

This lightweight metal is used in the battery in your cell phone and your laptop, in your iPod and your Kindle. Highly efficient lithium-ion technology is also what's going to deliver the energy that propels the drivetrain in battery-powered cars.

If you want to get rich, then hear my phrase and heed these words: This is the inevitable future.

Electric cars are unavoidable. A recent article in The Economist explained why: "In the next 40 years, the global fleet of passenger cars is expected to quadruple, to nearly three billion. China, which will soon overtake America as the world's biggest car market, could have as many cars on its roads in 2050 as there are on the planet today; India's fleet may have multiplied 50-fold."

The thing is, India and China have been dependent on the rest of the world forever. They're not going to be eternally hamstrung by oil sheiks or tin-pot dictators like Venezuela's Chavez or even Russia's Putin. The developing world wants green cars.

And they can have them. There's no incumbency to the gasoline-powered car in most of the world because most of the world doesn't even own cars now. But as China and India grow wealthier, that will change. The governments there (and here) will see to it that electric-vehicle technology is embraced, and huge markets for electric cars will develop. That means huge profits to be made by the smart investors who control the world's supply of lithium.

Who's that going to be? Let's ask The New York Times. In an article published Tuesday, it said: "The industry leader … is Sociedad Quimica y Minera (NYSE: SQM), a Chilean fertilizer company."

I agree. That's why I made this exact recommendation to Government-Driven Investing subscribers. Last November, in fact, five months before The Times took notice.

Third strategy for the uberwealthy: Head to the emerging world.

Don't go there for telecom, high debt yields or even consumer products, but for oil. A recent oil discovery in Uganda, for instance, could mean billions for its developer. And a handful of teeny British petroleum upstarts look like they've hit a gusher in the Falklands Basin, an offshore field that could contain billions of barrels of crude. (They've managed to shake up a diplomatic hornets' nest and now the U.S. State Department, the British Foreign Office, Argentine President Cristina Fernandez and even Hugo Chavez have entered the fray. The smart money -- that is, yours -- should bet that the Falklands will stay decidedly British and that these little oil companies will become decidedly delectable takeover targets.

As I look at these three strategies, I notice a common thread.

Government action.

Only governments can incentivize electric cars on a national level. Without tax breaks for research, subsidies for green-collar jobs and huge tax credits to early adopters, electric cars would be exorbitantly pricey and the exclusive purview of Hollywood liberals, well-heeled environmentalists and rich college kids in Berkeley and Boulder. But with the leader of the free world actively selling the Chevy Volt -- produced by a company his administration bailed out just for that purpose -- you can bet buyers will line up.

Result: Lithium booms.

Only governments can write laws that mandate the output of biofuel grow from 6.5 million gallons to 16 billion gallons. It takes the U.S. Department of Agriculture and Energy working in concert to make sure that the crops can be grown, the plants can be built and the companies have enough capital. That's what's happening now: The government is using stimulus money to provide grants and using Uncle Sam's credit to provide loan guarantees for cellulosic ethanol plants. The EPA had to adjust this year's output target down, from 100 million, but you can rest assured the government incentives will bolster output in short order.

Result: Huge returns for enzyme makers, plant builders and even seed companies. (You watch: Having made major advances in crop yields using genetics, smart companies like Monsanto Co. (NYSE: MON) will begin to introduce seeds in the next few years that also boost the sugar content of their plants. This will mean refineries can tease more ethanol from crop waste, boosting ethanol production, lowering our dependence on foreign oil and adding to the return on that section of ground you bought.)

Finally, only government action can resolve international disputes such as the diplomatic donnybrook raging in the South Atlantic over the oil in the Falklands. You can bet that Britain, which has controlled the island since 1833, will prevail and pave the way for substantial profits.

Result: Huge gains for shareholders of the companies involved.

If you're Big Rich, or aspire to be, then it only makes sense to follow Big Money. I'd suggest you always align your financial interests with the various interests these and other governments go to great lengths to support and protect.

Friday, March 12, 2010

The Gamestop Gambit -- Is It a Takeover Target?

OK, so shares of Gaemstop rallied yesterday on takeover rumors.

No one knows where they came from or who the buyer is.

More than a year ago, I said Microsoft should be Gamestop to build out its retail footprint. And a couple of months ago, when Gamestop took a dive, I said it was a buy again.

Here's the piece from February 2009:

Microsoft (Nasdaq: MSFT) said Friday it had hired a veteran Wal-Mart executive, David Porter, to oversee the development of brick-and-mortar retail stores. He will report to Kevin Turner, Microsoft's COO, who also has ties to Bentonville.

Apple (Nasdaq: AAPL) changed computer marketing with its hip advertising. It changed the computer market with its nifty devices, and it changed the computer marketplace with its stores. Microsoft sees the writing on the wall, and these hires underscore how serious Microsoft is about regaining any of the ground it has lost to Apple. Porter and Turner aren't show horses -- they're work horses. Wal-Mart executives get things done fast and cheap, and they never lose focus on the customer. That core competency will be vital to Microsoft's retail execution. Here are four reasons I think Porter's first step will be to engineer a merger with software retailer GameStop (NYSE: GME).

1. Microsoft Is Always on the Hunt for Deals
Though the ill-fated Yahoo merger is the most well known, Microsoft has put its vast cash hoard to work by acquiring companies that have something it needs. Over the past two years, MSFT's shopping cart has been loaded with search, voice and advertising technology. Certainly Microsoft has the human capital to develop new technologies on its own, but it's cheaper -- and far faster -- to simply buy it. The same is true with its stores.

And the fact is, Microsoft can quite literally buy anything it wants. The Redmond company is one of seven U.S. corporations to have a triple-A credit rating. It has cash on hand totaling $8.3 billion, and it has no long-term debt.

2. GameStop Has a Huge Footprint
GameStop has an international presence that includes 5,264 stores. GameStop's stores tend to be in urban areas, in shopping centers and strip malls. These aren't destination stores like Wal-Mart; they are located where people already eat, shop and work. This is precisely where Microsoft will seek to extend its reach and build its brand. A GameStop deal would give Microsoft an instant competitive advantage over Apple, which has only 250 stores. Many of GameStop locations are near existing Apple stores.

3. GameStop Is Cheap
GME is trading for only 12 times earnings. As the chart shows, that's near the ebb. GME's two-year average earnings multiple is 27.

Though a dramatically reduced P/E usually signals concerns about future earnings, GameStop doesn't have that worry.

Sales continue to be brisk. It even did well during the holidays, posting sales increases most retailers would have killed for. GameStop's EPS has never declined, and even in the current economic climate, earnings are forecast to rise.

4. GameStop Stores Meet Microsoft's Needs
GME's relatively small stores -- already clean and well-lit -- are ideal for Microsoft. They're less than crowded and could easily make room for Microsoft products, display kiosks and demonstration models. Maximizing store efficiency is something that Porter and Turner learned at Wal-Mart, which tracks revenue by square inch of shelf space. What's more, GameStop existing staff would gel nicely. They tend to be avid computer users, fluent in the lingo and up on the latest products.

GameStop Would be Acquired at a Premium
The vast majority of these shares are held by institutions, who have held on through GME's -46% decline in the past year and are unlikely to approve a merger that doesn't help make them whole, especially from a company that absolutely can afford to pay. GME's current market capitalization is roughly $4.3 billion. Microsoft would be getting a steal at $10 billion -- the footprint it wants and a business that produces tons of cash without any debt and doesn't have to burn cash to develop products. An acquisition at $45 a share would represent a +70% premium and still value the company at less than its historical valuation.

Think that's too rich of a premium for GameStop? Consider: Microsoft offered $31 a share for Yahoo last year when its shares were trading at $19.18. Yahoo rejected the +61.6% premium as too low, and after one of the strangest negotiations in corporate history, Microsoft raised its offer to $33 -- +72% over Yahoo's pre-merger offer price.

A Microsoft-GameStop deal makes sense financially for GME, MSFT and investors. It achieves overnight a footprint that otherwise would take years to build. And it marries two compatible cultures: Apple users aren't gamers, but Windows users are.

Here are the two ways you can play this, depending on your risk tolerance:

1. Go Long
Buy GameStop and hope for a takeover announcement that includes a rich premium.

The upside: It happens and the stock skyrockets to the takeover price.

The downside: The merger doesn't go through. What then? Well, it's not exactly bleak! All that happens is you will own shares of a successful earnings machine that you bought cheap yet is continuing to post ever-improving results.

2. Position Yourself for Huge Gains with Call Options
A call option gives an investor the right to buy a stock for a certain price during a certain time.

The Upside: Huge if the deal goes through.

The Downside: IF the options expire before you exercise or sell them, you're out whatever they cost you.

Thursday, March 11, 2010

The Only Company Left Standing in a $40 Billion Battle

Know when to hold 'em, Kenny Rogers taught us.

Know when to fold 'em. Know when to walk away.

And know when to run.

Northrop Grumman CEO Wes Bush evidently knows the song. Mr. Bush has decided to fold and walk away, if not run, from the U.S. Department of Defense's multibillion-dollar contest to build the Air Force's new tanker.

Northrup Grumman (NYSE: NOC), one of the top defense contractors in the world and the third-largest in the United States, announced Monday it was abandoning its bid for the new plane, clearing the way for rival Boeing (NYSE: BA) to win the $40 billion contract.

Boeing shares rose slightly on the news, though the stock is a clear winner so far this year. Shares are up +25% in 2010, utterly thumping of the Dow Jones Industrial Average's +1.4% year-to-date gain and thoroughly trouncing the broader S&P 500 Index, which Boeing has outpaced by an eye-popping 22.8 percentage points.

The path to this point has not been one of the great stories of American business. In fact, it's been a long-running and wholly disastrous soap opera, a cheap melodrama that has kept the military using refueling aircraft that were built during the Eisenhower administration. (No joke: The first of the 803 KC-135s the Pentagon bought took off on Aug. 31, 1956. That's five years before the current commander-in-chief was even born.)

The troubled tanker contract has encompassed more than just harsh criticism from lawmakers like Sen. John McCain, who objected to the terms of the initial deal, which was for the Pentagon to lease the planes; it has at times degenerated into outright scandal. A Boeing chief financial officer and a senior Pentagon buyer involved in the deal actually went to jail over illegal employment talks. Then, in 2008, Northrop won the deal. Boeing complained and won a do-over. Finally, after years of wrangling, Northrop bowed out.

Wall Street and Washington had been prepared for the possibility of a single-vendor contract. The question is not what this deal means for Boeing, the question is what comes next for the aerospace giant.

One possible answer could be India.

India is shopping for a fleet of 126 fighters to defend it from potential threats in Pakistan or China. The $11 billion deal has drawn serious competition: Lockheed Martin's F-16, Dassault's Rafale, the latest Russian MiG-35 and even Sweden's Saab. Boeing's F/A-18 Super Hornet is also a contender, as is the Eurofighter Typhoon, a joint project of Germany, Spain, Italy and Great Britain. The Eurofighter is considered the frontrunner to win the contract, according to India's ambassador to Italy, though Russia is typically India's main arms supplier.

We'll know which company will have the contract soon enough: Late last month, India said it was fast-tracking its procurement efforts and that the testing phase, during which time the country's military puts each company's plane through the paces, should wrap up by the middle of the year.

A handful of emerging countries have made it a top order of business to bolster their national defenses. India is a particularly dramatic example given sometimes troubled northern neighbors like Afghanistan and Pakistan, but the fact is the world grows smaller and more dangerous every day. This threatens the wealth and improved standards of living that dozens of small countries have toiled for decades to achieve. As more countries seek to protect themselves from aggression, business will continue to boom for Boeing.

And it's not like business is bad here at home. A $40 billion contract is a material chunk of business -- Boeing had $68.3 billion in revenue in 2009 -- but even that's a drop in the bucket. President Obama's overall defense budget for fiscal 2011, which Congress has yet to finalize, calls for $708.3 billion in Pentagon appropriations. Or, to put bring the number a little closer to home, Obama is calling for $7,083 per U.S. household in defense spending.

Only governments can spend money like that.

And companies like Boeing -- the only competitor left standing for the tanker and one of the finalists for the Indian fighter contract -- will profit from increased defense spending, both here and abroad, this year and next, to the benefit of shareholders who understand how government actions can deliver such strong returns.

Saturday, March 6, 2010

Increased Profits are a Lock for the Industry

Interesting data from your federal government:

The average wage of the 15.2 million employees in California, according to the U.S. Bureau of Labor Statistics, is $48,090. That's about $23.12 an hour.
Very low on the scale: Private security guards, at $25,950. Also bailiffs, who earn just under $49,000.

Yet relatively high on the scale is state prison guards, who can, with overtime, easily earn more than $100,000 a year. By contrast, a kindergarten teacher in the Golden State can expect to pull down an average $56,540.

If that makes you crazy, try this statistic on for size: Fully 9.5% of the California state budget is allocated toward prisons. Only 5.7%, by comparison, goes to universities.

Twenty-five years ago, prisons were 4% of the budget. Higher education represented 11% of the state budget.

The prison guards union has historically been one of the most powerful in the state. No one pays guards more. And these jobs are very secure: If Sacramento is facing the squeeze and has to furlough state workers, prison guards are one of the few groups that are exempt and must stay on the job.

Wages are only the tip of the compensation iceberg: Guards also receive generous health care and retirement benefits. You won't get 90% of your salary in retirement. A prison guard in California, however, absolutely will.

The Governator is not happy with this.

His administration has been plagued by budget crises. The current budget proposal creates a $20 billion deficit, which half of Californians -- according to a poll released today -- say should come not from more taxes but from spending cuts.

(The half that doesn't think that way were among those who sued the governor for exercising his line-item veto last year. The courts ruled on Tuesday that he had the authority to reduce or eliminate state programs.)

Mr. Schwarzenegger is sponsoring a ballot initiative that would automatically give more money to higher education than to prisons. He has also said he wants to build jails in Mexico to house the 20,000 or so illegal immigrants in California prisons. That suggestion, however, raises constitutional questions and is unlikely to gain traction as a serious solution.

What's left?

Well, the governor could let people out of jail. The politics of this are dicey, as anyone who remembers Willie Horton can attest.

There are other practical considerations as well. In some cases, release isn't even an option. California has a "three strikes" law. Since 1994, three felony convictions have put offenders in jail for the rest of their lives, with scant chances for parole. The law, upheld by the Supreme Court, is wildly popular. After 15 years, one study suggested it has saved the state $54 billion and prevented 10,000 murders.

I'll give you three guesses which lobby pushed that bill through the statehouse.

If you said "the California Correctional Peace Officers Association," you're right.
Mr. Schwarzenegger's only serious alternative is to find a cheaper solution than putting these inmates in prisons with platinum-paid guards. The governor can outsource the problem to companies with lower costs. Private prison operators pay security guard wages rather than correctional officer wages, which gives them a significant pricing advantage. (Wages represent 70% of a prison's budget.)

What's more, private business is far more adroit at building prisons than the slow ship of state can, especially during a financial crisis. And while there is some question as to whether it's kosher to ship inmates to Mexico, it's perfectly all right to ship them to another state.

All that is why 25 U.S. states have deals to outsource prisoners.

The leading vendor is Correctional Corporation of America (NYSE: CXW), a $2.4 billion company that operates 65 private prison facilities with 87,000 beds in 19 states and the District of Columbia.

Corrections revenue, not surprisingly, has not decreased since 2005. And the future looks bright for the company, not just because of the problems of Mr. Schwarzenegger, but because of the long-term trend toward harsher incarceration in this country. In 1980, 319,598 people were in prison. At the end of 2008, the latest year for which the Department of Justice has data, the total U.S. prison population stood at 1.5 million, a gain of +375%, exceeding the growth in the general population -- +32.4% -- more than tenfold.

The bottom line is that Corrections can't build prisons fast enough, and it will never run out of supply. Even given its status as the No. 1 operator of private prisons, its bed count is equal to a mere 5.7% of the total inmate population.
Given this immense growth potential, CXW is exceedingly cheap. Shares trade for a mere 15.5 times earnings, a significant discount to its historical average earnings multiple of 18.5 and a -13.9% discount to the broader market.

Low costs, strong margins and an endless supply of "customers" is as good as business models get. As governments, like Mr. Schwarzenegger's, seek to find ways to reduce spending, CXW's services will look very appealing. If his ballot initiative wins passage, the state will have no choice but to outsource massive amounts of prisoners.

These government actions are very good news for the company's shareholders -- and very good reasons to become one today.

Government actions mean big money.
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Thursday, March 4, 2010

EPA Ruling Could Mean a +50% Increase in Biofuel Demand

Wednesday I told you what an EPA rule change regarding cellulosic ethanol could mean for the Obama White House and, more important, what it could mean for the shareholders of an ethanol-industry leader.

That EPA ruling is a done deal.

Another proposed EPA rule is not a done deal, but investors should be aware of what could happen nonetheless.

What could happen is a +50% increase in the demand for ethanol.

The EPA -- that is, the Environmental Protection Agency -- was created in December 1970 by an executive order from President Richard Nixon, who also created the Occupational Safety & Health Administration (OSHA) later that same month. The EPA has since come to have a pretty wide regulatory throw. The agency oversees air and water quality, hazardous waste, land use (scenic rivers, surface mining, etc.) and endangered species. Most recently, the agency has been in the spotlight for adding carbon dioxide to its list of regulated air pollutants as part of President Obama's environmental agenda.

In December 2009, the EPA said initial tests had concluded that vehicles made after 2001 likely could burn gasoline that contains up to 15% ethanol, a fuel blend sometimes called E15. Take a look at the pump next time you fill up your tank: You'll likely see a sticker that says the gasoline you're buying is 10% ethanol.

This government action would increase the market for ethanol by +50%.

That's a nice number. But what does it mean? Well, according to the Renewable Fuels Association, it could mean an additional 5.38 billion gallons in demand. That's what adding 50% to the nation's current output would mean.

At the average rack price for ethanol of $2.72 per gallon, that's $14.5 billion in new ethanol dollars.

And that brings me to a point that all investors should realize. Yes, the government spends a lot of money. It's the most powerful financial force on the planet. But its regulations, which "cost" nothing, have a huge impact on the economy. The amount of new ethanol dollars this rule change would create is larger than the budget for the U.S. Treasury. It's also more than Mr. Obama has requested for the Social Security Administration, the Departments of Interior and Commerce, the Army Corps of Engineers or even the entire EPA itself. The total value of our nation's ethanol production is roughly the same as what Uncle Sam will spend on the Department of Justice in fiscal 2011.

U.S. Ethanol Production
Year Gallons Year Gallons
1980 175 million 1995 1.4 billion
1981 215 million 1996 1.1 billion
1982 350 million 1997 1.3 billion
1983 375 million 1998 1.4 billion
1984 430 million 1999 1.5 billion
1985 610 million 2000 1.6 billion
1986 710 million 2001 1.8 billion
1987 830 million 2002 2.1 billion
1988 845 million 2003 2.8 billion
1989 870 million 2004 3.4 billion
1990 900 million 2005 3.9 billion
1991 950 million 2006 4.8 billion
1992 1.1 billion 2007 6.5 billion
1993 1.2 billion 2008 9.0 billion
1994 1.3 billion 2009 10.8 billion

Why is the EPA suggesting this rule change? It's not, really, the agency is simply looking at the potential environmental effects of burning more ethanol. What's behind the change is not the chart above, which shows the long-term historical uptrend in ethanol output, but about the chart below, which shows the 2010-2022 output quotas for biofuels written into federal law.

You'll note that the demand for traditional corn-based "renewable" ethanol limits out at 15 billion gallons, a little less than the total the new 15% rule would necessitate. (Current 2009 production of 10.8 billion gallons plus 5.4 billion more = 16.2 billion gallons.) The ceiling on corn based-ethanol, as the chart shows, is only +25% above projected 2010 production.

Year Corn Ethanol (gallons) Cellulosic Ethanol (gallons)
2010 12 billion 65.0 million
2011 12.6 billion 250.0 million
2012 13.5 billion 500.0 million
2013 13.8 billion 1.0 billion
2014 14.1 billion 1.8 billion
2015 15.0 billion 3.0 billion
2016 15.0 billion 4.3 billion
2017 15.0 billion 5.5 billion
2018 15.0 billion 7.0 billion
2019 15.0 billion 8.5 billion
2020 15.0 billion 10.5 billion
2021 15.0 billion 13.5 billion
2022 15.0 billion 16.0 billion

However, that is not true for cellulosic ethanol, a biofuel that can be derived from any plant material -- not just corn. Its output is expected to go from this year's federally mandated 6.5 million gallons -- recently lowered from 100 million gallons -- to 16 billion gallons by 2022. That's a gain of +24,515%.

No other industry has this kind of growth potential.

And let's remember where that growth potential comes from. Not from fickle consumers but from federal law. This timetable was established by an energy bill passed by Congress and signed by President Bush in 2007.

So if corn-based ethanol roughly meets the existing demand and the demand with the revised 15% figure, where is all the rest of the ethanol going to go?

Answer: Right into your tank. Sen. Ben Nelson of Nebraska has already asked the EPA to look at E20 or E25 -- gasoline blends that contain 20% and 25% ethanol. He noted that that's the standard in Brazil -- the world's largest ethanol producer -- and that it has reported no damage to cars or even to small engines that power boats or chainsaws. EPA Administrator Lisa Jackson said EPA staff was already studying the data from Brazil.

And then there's E85. Some 2,233 gas stations in 1,586 U.S. cities sell motor fuel that is nearly pure ethanol, with only 15% gasoline. (You can find where to buy E85 in your neck of the woods here, but don't put it in your tank unless your car is designed to use it. E15, on the other hand, can go into any vehicle.) E85 is a great idea: It's the only type of fuel that could totally and permanently end U.S. dependence on Middle Eastern oil. We could literally grow all of our gas.

I'll be honest with you. For years all of this has been pie in the sky, the sort of stuff that a college professor said would one day be possible.

Today, it's the hard reality of the new energy economy that Mr. Obama has been talking about. It's no longer the fancy of utopian dreamers, it's the inevitable future of U.S. energy.

And the whole shooting match depends on one thing.

Enzymes.

Enzymes are compounds that help certain chemical reactions take place. Special enzymes make your jeans softer, for instance. In fact, one of the leading producers of denim-aging enzymes has become one of the leaders in the production of cellulosic ethanol.

His name is Mark Emalfarb. His fascinating biotech company is Dyadic International (OTC: DYAI). And its shares have already meant a triple-digit gain for readers of my premium Government-Driven Investing subscribers. Not only are these shares held in the newsletter's portfolio, I personally own them.

You see, cellulosic ethanol production isn't possible without these designer enzymes. I'll spare you the arcane chemistry behind what happens, but suffice it to say that Dyadic is a clear leader. Such a clear leader, in fact, that Royal Dutch Shell's (NYSE: RDS-A) $12 billion cellulosic ethanol deal with a Brazilian sugar company depends on it. At least that's what the new venture told the Securities and Exchange Commission. It noted that losing Dyadic's technology would have a materially deleterious effect on its business model.

The bottom line is that Dyadic, with a market cap of about $55 million, has an exclusive right to an enzyme that is crucial to a $12 billion deal. And it should be pointed out, as Mr. Emalfarb surely would, that this is a nonexclusive licensing agreement. Dyadic is free to rent its technology to anyone it sees fit. Anyone who might be scrambling to gain a share of the +50% increase in business that the new EPA rule, expected in late summer, could mean. Or anyone looking to take advantage of the +24,515% increase in business that Uncle Sam is guaranteeing.

The EPA -- and here I am just being honest -- typically doesn’t do anything to business but add cost. For Dyadic, however, it's creating a vast new market with nearly unlimited profit potential. No investor who wishes to reap a windfall from the green energy economy can afford to ignore Dyadic.


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