Fundamental Short Selling Research

Eric Fernandez, CFA

TwoRiversAnalytics

Equity Bottom-Up

We issue in-process short research ideas periodically.  Our formal recommendations will likely come from this list, although not all will make the final cut.  Here we introduce a series of names that look interesting.Atkore Inc (ATKR), Producer Manufacturing, Grocery Outlet Holding Corp. (GO) Food Retail, PBF Energy, Inc. Class A (PBF), Oil Refining/Marketing, Ping Identity Holding Corp. (PING) Packaged Software, Renewable Energy Group, (REGI) Chemicals: Specialty, Blink Charging Co (BLNK) Other Consumer Services.

We issue in-process short research ideas periodically.  Our formal recommendations will likely come from this list, although not all will make the final cut.  Here we introduce a series of names that look interesting.Atkore Inc (ATKR), Producer Manufacturing, Grocery Outlet Holding Corp. (GO) Food Retail, PBF Energy, Inc. Class A (PBF), Oil Refining/Marketing, Ping Identity Holding Corp. (PING) Packaged Software, Renewable Energy Group, (REGI) Chemicals: Specialty, Blink Charging Co (BLNK) Other Consumer Services.  

Short Ideas "On the Workbench" - Promising Shorts Under Our Research Microscope.

Founder, BWS Financial Inc

Hamed Khorsand

Founder

Independent Stock Specific Research

BWS Financial Inc

BWS provides independent stock specific research focused on companies with distinct value that are going through a special situation where there is a tangible catalyst not priced in. The catalyst can be anything from new product, restructuring, M&A, management change, change in business strategy, etc. BWS’s focus is to understand the change and evaluate the potential return for investors.

BWS utilizes a self formed proprietary approach in discovering stocks by putting great emphasis on deep research. BWS does generate short recommendations following a similar criteria.

Renewable Energy Group / Equity Bottom-Up

<ul type="disc"><li>Headline risk to what the new EPA renewable fuel mandate could be for 2020 and 2021 has caused many investors to ignore the basic barometer in the health of Renewable Energy Group (REGI) gross margin.</li></ul> <ul type="disc"><li>The heating oil soybean oil (“HOBO”) spread has narrowed to levels not seen since the beginning of March, which allows for the HOBO plus renewable identification number (“RIN”) to increase to its highest we have seen in many quarters.</li></ul> <ul type="disc"><li>Geismar being offline for approximately two weeks should result in 3.5 million gallons of production being missed. This should mean REGI produces approximately the same gallons as it did in the second quarter.</li></ul> <ul type="disc"><li>We are already the highest earnings and adjusted EBITDA estimates in the consensus and see no reason to lifting our estimates. The wider spreads REGI is experiencing should provide more than ample room for the Company to generate adjusted EBITDA above the current guidance of $70 million to $90 million for the third quarter.</li></ul>

Headline risk to what the new EPA renewable fuel mandate could be for 2020 and 2021 has caused many investors to ignore the basic barometer in the health of Renewable Energy Group (REGI) gross margin. The heating oil soybean oil (“HOBO”) spread has narrowed to levels not seen since the beginning of March, which allows for the HOBO plus renewable identification number (“RIN”) to increase to its highest we have seen in many quarters. Geismar being offline for approximately two weeks should result in 3.5 million gallons of production being missed. This should mean REGI produces approximately the same gallons as it did in the second quarter. We are already the highest earnings and adjusted EBITDA estimates in the consensus and see no reason to lifting our estimates. The wider spreads REGI is experiencing should provide more than ample room for the Company to generate adjusted EBITDA above the current guidance of $70 million to $90 million for the third quarter.

REGI: Widening Margin Fuels Outperformance

<ul type="disc"><li>
Renewable Energy Group (REGI) demonstrated its abilities to use multiple feedstocks in the second quarter to widen its gross margin. Like we had prognosticated in our earlier research updates, REGI reported a larger than expected gross margin in the second quarter easily exceeding our forecasts and consensus estimates.</li></ul> <ul type="disc"><li>REGI’s management has continuously asserted their ability to use multiple feedstocks in their production process to offset the rising price of soybean oil. REGI’s ability to quickly change feedstocks gives the Company an edge when there is price volatility.</li></ul> <ul type="disc"><li>REGI reported second quarter revenue of $816.2 million, which was a derivative of the increase in B100 prices. The highlight of the quarter was REGI’s gross margin of 15.1 percent leading to REGI reporting operating income of $87.6 million.</li></ul> <ul type="disc"><li>The second quarter results should create investor interest in the shares as REGI could now post adjusted EBITDA of more than $300 million in 2021. With underlying demand rising, and REGI putting greater attention downstream, REGI’s 2022 gross margin could expand even though gallons produced remains flat.</li></ul>


Renewable Energy Group (REGI) demonstrated its abilities to use multiple feedstocks in the second quarter to widen its gross margin. Like we had prognosticated in our earlier research updates, REGI reported a larger than expected gross margin in the second quarter easily exceeding our forecasts and consensus estimates. REGI’s management has continuously asserted their ability to use multiple feedstocks in their production process to offset the rising price of soybean oil. REGI’s ability to quickly change feedstocks gives the Company an edge when there is price volatility. REGI reported second quarter revenue of $816.2 million, which was a derivative of the increase in B100 prices. The highlight of the quarter was REGI’s gross margin of 15.1 percent leading to REGI reporting operating income of $87.6 million. The second quarter results should create investor interest in the shares as REGI could now post adjusted EBITDA of more than $300 million in 2021. With underlying demand rising, and REGI putting greater attention downstream, REGI’s 2022 gross margin could expand even though gallons produced remains flat.

<ul type="disc"><li>Focus for the last year and a half had been put on the magnitude of gross margin Renewable Energy Group (REGI) was able to achieve every quarter. In the past couple months, the political environment has intensified with the pending decision from the EPA. Media reports continue to suggest the agency is considering leaving the blend unchanged compared to 2020.</li></ul> <ul type="disc"><li>The political landscape changes the dynamics of the renewable diesel industry back to the state it was in couple of years ago. It could serve as a deterrent for new entrants since EPA mandates have the biggest impact on the industry and profitability.</li></ul> <ul type="disc"><li>The volatility from headlines in June resulted in renewable identification number (“RIN”) prices to adjust lower from their all-time highs. However, the price of soybean oil also declined with fears demand would erode with the new EPA rules.</li></ul> <ul type="disc"><li>This level of volatility has resulted in the heating oil soybean oil (“HOBO”)-RIN margin to widen from the beginning of June. REGI’s third quarter could benefit from wider margins.</li></ul>

Focus for the last year and a half had been put on the magnitude of gross margin Renewable Energy Group (REGI) was able to achieve every quarter. In the past couple months, the political environment has intensified with the pending decision from the EPA. Media reports continue to suggest the agency is considering leaving the blend unchanged compared to 2020. The political landscape changes the dynamics of the renewable diesel industry back to the state it was in couple of years ago. It could serve as a deterrent for new entrants since EPA mandates have the biggest impact on the industry and profitability. The volatility from headlines in June resulted in renewable identification number (“RIN”) prices to adjust lower from their all-time highs. However, the price of soybean oil also declined with fears demand would erode with the new EPA rules. This level of volatility has resulted in the heating oil soybean oil (“HOBO”)-RIN margin to widen from the beginning of June. REGI’s third quarter could benefit from wider margins.

• Media reports of the EPA not changing its biofuel mandate for 2021 and 2022 created some selling pressure for Renewable Energy Group (REGI) stock. The EPA has yet to issue its renewable fuel mandate for 2021 and 2022.• Only one large project is expected to come online for 2022 with more not planned until 2023. New low carbon fuel standards (“LCFS”) in Washington and New York should help create opportunity to sell more renewable diesel. • The last issued renewable fuel standard from the EPA was 20.09 billion gallons of which 2.43 billion were biomass-based diesel. The final 2020 biomass-based diesel level was approximately 300 million gallons more than 2019 levels even though the total number of renewable gallons was nearly unchanged. • D4 renewable identification number (“RIN”) prices continue to accommodate the increase in soybean oil costs and have not shown any direction related to the EPA media reports.

• Media reports of the EPA not changing its biofuel mandate for 2021 and 2022 created some selling pressure for Renewable Energy Group (REGI) stock. The EPA has yet to issue its renewable fuel mandate for 2021 and 2022.• Only one large project is expected to come online for 2022 with more not planned until 2023. New low carbon fuel standards (“LCFS”) in Washington and New York should help create opportunity to sell more renewable diesel. • The last issued renewable fuel standard from the EPA was 20.09 billion gallons of which 2.43 billion were biomass-based diesel. The final 2020 biomass-based diesel level was approximately 300 million gallons more than 2019 levels even though the total number of renewable gallons was nearly unchanged. • D4 renewable identification number (“RIN”) prices continue to accommodate the increase in soybean oil costs and have not shown any direction related to the EPA media reports. 

United States

Renewable Energy Group Inc. produces biofuels and renewable chemicals. The Company develops, distributes, sells, and provides logistics for biodiesel and renewable chemical production. Renewable Energy Group serves companies throughout the United States.

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Renewable Energy Group (REGI US)

Short Ideas "On the Workbench" - Promising Shorts Under Our Research Microscope.

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Eric Fernandez, CFA

REGI: Widening Margin Fuels Outperformance

The current margin spread should result in higher adjusted EBITDA margins than expected. The HOBO plus RIN spread has remained consistently above...

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REGI: Renewed Margin Expansion

REGI is managing its feedstock without getting duly credited by investors. Gross margin remains ahead of consensus estimates, but stock continues...

BWS Financial Inc

REGI: Margins from Volatility

Political headline risk is a positive for Renewable Energy Group's (REGI) gross margin profile as feedstock prices decline and RIN prices remain...

BWS Financial Inc

REGI: Rumors of Action

Rumors of EPA renewable fuel mandate caused unwarranted volatility in REGI. There is limited volume coming online next year and EPA has usually...

BWS Financial Inc

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