4 of the Best Biofuels Stocks

Ethanol blends of 15%, or E15, just got a green light from the Supreme Court. Trade groups representing the oil, food, and automaker industries challenged that such high blends of ethanol would damage engines, raise food prices, and hike the price paid at the pump by consumers. The Supreme Court decided to leave current Environmental Protection Agency rules in place after the consortium (in three separate cases) failed to provide evidence that those claims were, in fact, harmful to its members. It sure isn't good news for the argument against E15, but it is vindication for ethanol producers. Since biofuels figure to be staying put with mandated growth for the time being, let's review four of the best biofuels stocks.

Clean Energy Fuels (NASDAQ: CLNE  ) The leader in compressed natural gas, or CNG, for the transportation industry got a boost from the EPA earlier this year when CNG sourced from landfills gained the ability to qualify for advanced biofuel subsidies. It's the next best thing to cellulosic ethanol credits, if not better. That can add a nice revenue stream to Clean Energy's already promising business model, and expedite its journey to profitability. Except for a tad more paperwork, the company doesn't have to change operations one bit. What's not to like?

KiOR (NASDAQ: KIOR  ) Here's a company that often gets associated with industrial biotech companies, but there are very few comparisons. Rather than encouraging microbes to pump out useful chemicals and fuels in biochemical processes, KiOR uses standard thermocatalytic reactions to turn wood chips and waste into drop-in fuels. The company does not produce cellulosic ethanol or biodiesel. The company produces chemically identical cellulosic gasoline and diesel, although current operations churn out fuel blendstocks. KiOR's first facility has an annual capacity of between 11-13 million gallons of fuels, while a larger facility will be three times that size. A modular platform and catalytic improvements will help boost economics and scale for future production.

Renewable Energy Group (NASDAQ: REGI  ) The nation's largest biodiesel producer has been one of my favorite companies to watch in the last year. It appears that the market is finally giving the company's $1 billion in annual revenue a reasonable value. A retroactively instated batch of blending credits from 2012 certainly helped to boost first-quarter income to a record $46.4 million, or a profit margin of 14%. Of course, uncertainty in mandates and production volume obligations seems to punish REG at the end of each year. The nation has plenty of overcapacity to switch on -- or export -- and biodiesel is far from facing the blending constraints of ethanol. So I think the company's future is pretty safe for the time being.

Valero (NYSE: VLO  ) If you aren't keen on investing in pure play biofuels stocks, then you may want to give Valero a look. The nation's third-largest refiner is also the nation's third-largest ethanol producer. While it has increased its investment in renewable energy in recent years, including microalgae technology, ethanol facilities, and wind farms, it has also been one of the loudest critics of ethanol-blending mandates. Valero recently told investors that blending a few million more gallons into its fuel this year will increase blending costs from $250 million in 2012 to as high as $750 million this year. To mitigate that effect, the company has activated mothballed ethanol plants in its network. I acknowledge that higher blends will cost more to create, but I find it difficult to see an increase of 200% from such a marginal increase. Regardless, you have an opportunity to play an increase in domestic oil production and biofuels.

Foolish bottom line
I admit I am a bit biased toward renewable technologies, although I am not afraid to acknowledge the shortcomings of current biofuel policies. At the end of the day, we can all agree that biofuels remain a controversial topic going forward. While future targets, especially for ethanol, should be cut, I don't think future use will drop from current levels. So it may behoove you to at least consider biofuel stocks as a growth opportunity for your portfolio.