An Industry with +91.7% Annual Growth Backed by Federal Law

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 Region 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 seraP/Es 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 costing 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 Bienly 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.