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Six Alt-Energy Stocks That Could Go to Zero - 123947 views
Forget about technology stocks; forget about biotech stocks. Alternative energy stocks are the “new” growth stocks on Wall Street.
Investors are increasingly turning their attention to sectors such as wind, solar, fuel cells and even ethanol in search of the next big thing. The general public’s interest in these new technologies is so high that a new TV channel was created by Discovery (DISCA)
that will focus on green initiatives and eco-friendly lifestyles.
With all this hoopla being created, it seems as if the love for anything alternative-energy-related will never end. Even when these stocks fall, Wall Street immediately calls the selloffs buying opportunities. Investors foolishly listen and cast aside fundamentals while jumping into the hottest names head first.
A lot of what is going on now in alternative energy stocks reminds me of the dot-com days. A new technology is discovered and then hyped up as the next great thing that will solve everyone’s energy dependency problems. Unfortunately, very few companies actually end up delivering on the hype, just as very few dot-coms survived or ended up making money.
Despite that reality, investors continue to hold on to hope that they have found the next First Solar (FSLR) or the next Energy Conversion Devices (ENER). And although some stocks will be winners, many will leave investors holding the bag.
Market players who pick the wrong stocks in the alternative energy complex will certainly experience pain. Remember what happened the last time profits in a sector didn’t matter. Don’t let history repeat itself -- avoid the dogs!
With this in mind, here are six alternative energy stocks that could go to zero:
Beacon Power (BCON): Beacon Power makes energy storage devices that use the flywheel-based technology. The financials at this company are deteriorating at an alarming rate. Recently, Beacon reported a first-quarter net loss of $5.29 million, vs. a net loss of $3.09 million a year ago. Revenues for the first quarter plunged sharply to $20,000, vs. $393,000 last year. That’s a drop investors shouldn’t ignore.
The company continues to dilute shareholders by issuing new stock to raise capital. If the company was accelerating revenues at the same time, then the new stock issues wouldn’t be such a problem. However, that just isn’t the case with Beacon. The company’s burn rate of $5 million per quarter and only $25 million in cash on hand is another serious red flag. That only gives them enough cash to operate for a year and forces them to raise more money to survive. The short sellers are leaning on more than 17% of the float in this stock, and I think they will be right.
The financials on Becaon speak volumes: market cap $117 million, revenues of $1.02 million, EBITDA of -$16.24 million and quarterly revenue growth of -94%. There’s no “beacon of light” at Beacon Power. I am giving this stock a one-way ticket to zeroville.
Valence Technology (VLNC): Valence Technology is a Texas-based developer of safe lithium phosphate energy storage solutions. The company makes rechargeable batteries for scooters, wheelchairs, robotics, hybrid and electric vehicles and other devices. One of its clients you might have heard of is Segway.
Recently, the company’s CFO, Galen Fisher, resigned from his position after just five months on the job. The departure of Fisher comes only a few weeks after Valence’s independent auditor issued a “going concern” qualification for its financial statements for fiscal 2008. The auditors seem to be concerned with the company’s net debt of $50 million and EBITDA of -$13.56 million. The rest of the investing world probably has a problem with the fact that Valence hasn’t turned a profit in its entire 15 years of existence!
For the fiscal year ending on March 31, Valence reported sales of $20.9 million, vs. $16.7 million a year ago, and said net losses were $19.6 million, vs. $22.4 million for last year. But those sales were mainly driven by strong demand batteries that power the Segway. Investors in this stock need to think deep and consider if a high-priced scooter is going to lead this firm to a successful future. Let me save you the time and deep thinking -- it’s not going to happen!
Have a look at the financials for Valence: market cap of $503 million (that’s million with an “m”), EV/EBITDA of -41, gross profit of $1.82 million, operating margin of -68.25% and total cash of $2.88 million. No wonder 22% of the float is sold short. I hope this company can create a battery that will recharge its stock when it hits zero.
VeraSun Energy (VSE): VeraSun Energy is an ethanol producer that owns and operates five ethanol production facilities in the U.S. This company is facing some serious headwinds. First, Brazil is pushing for the ethanol tariffs to be lifted in the U.S. so that its sugarcane growers can import a much cheaper form of ethanol. Another problem is that the company has no corn hedges, which leaves it completely vulnerable to another run higher in corn. Higher corn prices will deliver a direct hit to VeraSun's margins, and raising prices on ethanol doesn’t seem like a viable option.
Finally, the ethanol mandate in the U.S. could be completely scrapped due to the strong moral argument against using a food crop to produce fuel. Let’s face it: Ethanol has done little to bring down the price of gasoline and in turn has caused food prices to soar. Taking food out of people’s mouths for what has amounted to almost no sizable benefit is frankly absurd.
The issues with this company don’t stop there. A recent report from the president of a biofuel restructuring advisory group showed that 12 small to mid-sized biodiesel and ethanol plants have already declared bankruptcy due to the high costs of corn and soybeans. Now, granted, the prices of corn and soybeans have come down recently, but remember that this company doesn’t hedge. Even some of the worst-run airlines in the world have learned to hedge commodity costs.
Still not convinced? Let me show you the financials for VeraSun: $973 million market cap, P/E ratio of 16, EBITDA of $104.99 million, total cash of $76.4 million and total debt of a whopping $935.51 million. Many of the bulls on ethanol will often argue that the biofuel is not the answer for energy independence; it’s just a step in the right direction. Well, if it’s not the answer, then why invest in it? A step in the right direction could be insolvent in six months. Don’t believe the hype on ethanol, and avoid VeraSun before it hits zero.
I will also include ethanol stocks Pacific Ethanol (PEIX) and Aventine Renew Energy (AVR) in the same category as VeraSun. Pacific Ethanol is held in Bill Gates’ investment fund Cascade Investments. My guess is that Gates wishes he'd put some money in First Solar instead, with Pacific Ethanol down 76% on the year. Ouch! Again, I reiterate that these stocks are going to zero -- or at best an ear of corn will be worth more than one share of Pacific Ethanol, Aventine or VeraSun.
Capstone Turbine (CPST): Capstone Turbine is a clean technology manufacturer that produces low-emission microturbine systems. The first thing I noticed about Capstone was the extremely bullish view on the stock among the analyst community. Four brokerage houses have upgraded the stock with an “outperform” or “buy” rating this year. The problem with that is that the company has a history of producing nothing but large losses.
Recently, the company reported a net loss for the fourth quarter of $9.5 million, vs. a loss of $8.5 million a year ago, due to higher manufacturing and overhead costs. What I found even more troubling then lack of profits at Capstone is a recent press release that seemed like a lot of hype. The company said it received an order from an Israeli company for the development and modification of one of Capstone’s microturbines to operate on solar energy. Capstone sure picked an interesting week to release that news -- major solar company First Solar reported earnings on Wednesday night.
Even more troubling were some comments from Capstone’s CEO, Darren R. Jamison, in a Bloomberg article last week. Jamison said: “$50 million in sales is very obtainable and reasonable this fiscal year and that profitability by 2012 was a reasonable date.”
Here’s the problem: Now the CEO has a credibility issue. First, he’s announcing internal financial projections to the public, which the company says it doesn’t do. Yet it just did. Second, now the company has to hit those numbers, or people will think he was attempting to hype up the stock.
Investors need to consider if Capstone is developing a pattern of hype. I think it is, and that’s a red flag. With 21% of the float short, it sure seems as if the bears sense something is wrong here too.
So now you know. Be aware when considering these six names.
A note from James Altucher:
Every weekend I send an email to Jim Cramer and several hedge fund managers about the most interesting portfolios posted on Stockpickr that week. Usually those portfolios not only list stocks according to a theme but also offer significant analysis as to why the stocks are cheap.
Here are some examples:
Here's the challenge: Build a portfolio at Stockpickr.com with great analysis, and send me the link. Each great portfolio (with analysis) will get posted on TheStreet.com with your byline (as a "Stockpickr Guest Columnist") and will be included in my email I send to Jim and the other
hedge fund managers on my list.
At the time of publication, James Altucher had no positions in stocks mentioned.
Posted August 4, 2008