Lights Out on Alternative Energy Stocks
18-May-01 04:50 ET
[BRIEFING.COM - Robert Walberg] Not two months after one of the most brutal declines in market history, investors - no speculators - are at it again. So much for lessons learned.
Two years ago it was the Internet sector; last year it was optical networking and biotech stocks; today, the buzz on the street centers around the alternative energy group. Bolstered by the energy crisis in California, and by favorable treatment in President Bush's drill and spill energy plan, the group is red hot.
Since bottoming in March, the average gain of the six stocks listed in the table below is an eye-popping 97% - no shortage of energy here. By comparison, the Nasdaq has jumped 35% off its early-April low.
But before you plunk down your hard-earned cash and chase after "the next great growth industry," take a step back and remember some of the lessons from the recent bear market.
Lesson one: A good story does not a good stock make. Just because California is experiencing rolling blackouts, and New York may experience an energy shortage of its own this summer, doesn't mean that individuals or corporations will be going out and spending big bucks on alternative energy solutions. In case you haven't heard, corporate America is in the midst of a nasty earnings slowdown. As for the consumer, it's hard to imagine that the same folks that are out there buying gas-guzzling SUVs are going to seriously consider spending their disposable income on a relatively expensive alternative energy solution. Just ain't going to happen. So while the news and newspaper headlines provide excellent press for the sector, the bottom-line is that alternative energy stocks remain much more about potential than profit.
Lesson two: Do the math. While sales figures from the past twelve months indicate that the sector has tremendous upside potential over the next few years (because the base is so small), valuations suggest that most (if not all) of that good news is already priced into the group. The average p/s ratio of the stocks profiled below is 123x. Note that Millennium Cell (MCEL) was excluded from the calculation, as it doesn't have any revenues. And then there are the earnings. No wait a minute, we don't have to worry about calculating those pesky p/e ratios given that none of the companies are expected to post a profit in FY01. Only one, Capstone (CPST), is expected to turn a profit next year.
Lesson three: Hyper-growth begets mucho competition. Established companies such as Caterpillar (CAT), Ingersoll-Rand (IR), General Electric (GE) and Avista Corp (AVA) are already crowding the field, and if the group continues to fly, it won't be long - even in this market - for a number of new companies to crash the party. The end result: a) flatter growth curves, b) potential margin pressures, c) product/company marginalization, and/or d) increased supply (of stock in the group) which results in slower stock price appreciation (at best) or big price declines.
The outlook for this industry has never been brighter. Current headlines reinforce that fact. However, the train left the station months ago. These stocks may continue to ride the news cycle to higher highs over the short-term, but ridiculous valuations suggest that now is not the time to be initiating new buys. On the contrary, the time has come to turn the lights out and move on.
Stock Mkt. Cap TTM Sales P/S FY01 Est FY02 Est % Gain off March Lows
Plug Power (PLUG) 29.14 $1.28 bln $6.5 mln 197x ($1.68) ($1.53) 133%
H Power (HPOW) 12.97 $692.6 mln $3.9 mln 178x ($0.45) ($0.53) 147%
Capstone (CPST) 35.15 $2.68 bln $28.3 mln 95x ($0.26) $0.21 62%
Ballard Power (BLDP) 57.60 $5.13 bln $61.6 mln 83x ($0.83) ($0.82) 76%
FuelCell (FCEL) 85.28 $1.35 bln $22.4 mln 60.3x ($1.36) ($1.45) 122%
Millennium Cell (MCEL) 11.56 $314.4 mln NA* NA ($0.36) ($0.45) 110%
*MCEL hasn't generated any revenues yet
Robert Walberg
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