When CEOs Cry
One of my investing theorems is that CEOs who have time to complain when I write about their overpriced stock are probably worried about their overpriced stock, and not running the business. After all, if their business is great, what does it matter what I think? And if I'm really as big a ninny as they claim in their PR campaigns, why bother trying to refute me?
That's what we might be asking about our friends at Earth Biofuels, whom I wrote about here:
CEO Dennis McLaughlin, the guy who was involved with penny-stock disasters like Blue Wireless and Ocean Resources, put up a long-winded rebuttal on the Earth site.
Note that shortly after the original article, their IR guy contacted us and said there were all sorts of false and misleading statements in the original writeup, but when asked what those might be, he stopped responding. I'm guessing that's because they figured out that my opinion of their business (summar: lousy and overpriced) doesn't qualify as a "false" statement, thanks to a little thing we've got in the U.S. called the first ammendment. (Of course, if there is any mistake in fact in there, I'll make an immediate correction upon seeing the contradictory evidence...)
Back to Earth's self-contradictory screed, which is pretty much like an extra-long version of the rebuttals I've seen from companies like GlobeTel, and other penny-stocks extraordinnaire. I find it pretty amusing, and it looks to me like a pretty good indication of desperation. My favorite part is where they tell you that earnings don't matter, cash flow does, and then have to fess up that their cash flow has been bad, and then change direction and say that there's more to a valuation than cash flow. (Tell it to the financiers out there, Mr. M.)
I'm sorry to see that Mr. McLaughlin didn't take the time to tell us more about his roles at Blue Wireless, Ocean resources, and the bankruptcy at Aurora Natural Gas, or Aurion Technologies (http://www.b.../story8.html)
I'm also sorry to see that he didn't talk more about Earth's great plans for profits. For example, did you know that Earth's Durant, OK plant is designed NOT to be automated? Why try and get more efficiency when you can collect tax credits! Collecting tax credits? Is THAT the business plan at Earth? According to what Earth's IR guy told the Durant Democrat, it is, at least in part
Are tax incentives a growth industry? I doubt it, even with a Democratic congress. But, as I've pointed out here (http://www.fool.com/news/mft/2006/mft06112227.htm) Earth can't even break even on its product at the gross margin level without those incentives. What will it do when its margins are crushed by big players like ADM? Plead for more public money? This is exactly why I predict that 90% of the "alternative fuel" plays out there will burn investors big time.
Just remember -- there's billions of bucks worth of cheap financing available these days to people with ideas for businesses that can create cash flow. That's what all those private equity deals are about. Given that reality, why do you suppose these biofuel companies are all springing their shares onto the market these days? Could it be the smart money won't hand them wads of cash, but gullible equity investors will? And, of course, the supply of gullible equity investors can dry up pretty quickly when a stock tanks, which is why we see so much happy news from the entire alt-energy space...
But back to Earth: Things just keep on getting better! Remember the fuzzy market math on Earth and its parent holder, Apollo Resources? (http://finance.yahoo.com/q?s=AOOR.OB) Here's another brain tickler for you mathies out there. Apollo is currently valued by the market at a market cap of $37 million. Yet Apollo sold Earth (its subsidiary) a LNG business for $36 million worth of Earth Stock.
So, lemme get this straight. Apollo's a major holder of Earth, and it's got a biz worth $36 million, but the market thinks ALL of Apollo is only worth $37 million? And someone please explain to me why Apollo -- if it already owns this great LNG biz, feels the need to offload it onto one of its subsidiaries for a stock swap? Could it be because they think they're getting the better end of the trade?
Keep watching this story, folks. If we don't see Earth crash and burn, I'll take a bath in biowillie...