TPS Position Update – June 10, 2015

| June 10, 2015

TPS Position Update

Let’s check in on a pair of alternative energy stocks in the portfolio that we haven’t had a chance to look at for a while.

There is a big question mark looming over each one, and it’s political.

If the Republicans recapture the White House in 2016, and the U. S. Department of Energy cuts backs on grants and loans, what will the impact be?

What kind of regulatory changes could shake up the alternative energy business landscape?

It’s impossible to answer these questions.  But some tunnel vision creeps in if you don’t bring political considerations into play when you think about the long-term future of two stocks in our portfolio.

Has the prospect of a Republican White House, Congress, and Senate spooked investors and hurt the performance of these companies?

It could be.  

But let’s cut politics out of the equation for now, turn down the volume on the talking heads, and see what’s really going on at U.S. Geothermal Inc. and Fuel Cell Energy.

. . . . US Geothermal Inc. (AMEX: HTM) – Hold 

We recommended the stock in April 2014.  We gave a buy price of $.78, and HTM edged up to $.85.

For the past 10 months, the stock has been trading below $.72.  It has tested a support level of $.43 and has held firm, but HTM has been stuck in a channel, trading between $.46 and $.53 for the past three months.

We like to stay away from trades when a stock is boxed in like this, and we would prefer to wait for it to break free from this channel and start a trend.

Based on this technical analysis, should you sell HTM?  Not yet.  The fact it’s stayed above $.43 is encouraging.  What’s discouraging is that it hasn’t been able to pierce the $.54 resistance level.  (But it’s come close.)

So as frustrating as it is to be stuck in this holding pattern, it’s probably a good time to be patient.

What about the U.S. Geothermal fundamentals?  Financial performance is a mixed bag.  During the first quarter, we saw some good things, like the reduction of debt.

But we also saw a slight dip in revenues.  And net income was off by more than 30%.

Looking ahead for the balance of 2015, management is hedging its bets.  It is forecasting 2015 Adjusted Net Income to come in anywhere between $1.9 and $5.9 million.

A pretty broad target to hit, isn’t it?  But U.S. Geothermal isn’t the first company to cover the revenue bet like this, and it won’t be the last.

The reasons to hang on, along with the dangers of selling before a breakout from the channel?

Long-term debt keeps going down. It has a bit more money in the bank than it did a few years ago.  Major institutional investors like Vanguard and Wells Fargo are still on board.

And the business of generating and selling electricity from geothermal energy sources is a good business to be in.  

. . . . Fuel Cell Energy (AMEX: FCEL) – Hold 

It’s been in our portfolio for almost three years now.  We recommended Fuel Cell Energy Inc. at $1.31, it surged up to $4.74, and has settled back down to $1.16.

Just like HTM, it is trading in a channel.  Since the beginning of the year, the stock has bounced between $1.53 and $1.09.  January was a rough month, but HTM has stabilized a bit, even though the revenue picture is uncertain.

The problem…

Q2 revenue took a nasty hit, down to $28.6 million from $38.3 million a year earlier.  One reason for this:  revenue for projects under construction won’t be recognized right away, and will show up as revenue in future quarters, once they’re actually completed.

Chief Executive Officer Chip Bottone says, “Despite lower revenues for the quarter, margins are creeping up as we want. It’s all good.  We have transitioned from being a supplier of products to a developer of projects.” 

With revenue being plowed into future quarters, losses narrowing, and margins edging up, we’re inclined to be patient with FCEL.  Hold onto your position.

Action To Take

  • Hold US Geothermal (AMEX: HTM)
  • Hold Fuel Cell Energy (AMEX: FCEL)

Category: TPS Update

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