Five weeks ago, fuel cell stocks, and Plug Power (PLUG) in particular were all the rage. At the end of February, Plug announced a huge contract with Wal-Mart for 1,738 of their GenDrive fuel cell units, to be deployed over the next two years. More importantly in the eyes of many, the deal also included a six year service contract.
For a company that had been struggling to gain mainstream acceptance for a disruptive technology, the blessing of the mighty Wal-Mart was a godsend and the stock reacted accordingly. PLUG closed on February 25th, the day before the announcement, at $3.90 and by March 10th had shot up to over $11…then came the crash. Renowned short sellers Citron released a scathing report that highlighted the fact that Plug had never made money in 10 years of existence. The bubble burst and PLUG plummeted to around half of that price.
As you would expect, the volatility continued for a while, with double digit percentage price swings seemingly every day and huge trading volume.
The three month chart above, though, shows that both in terms of volume and volatility, things have calmed down over the last few weeks. This has no doubt calmed the nerves of those that were holding the stock, but I suspect it may have those with short positions worried, and there are plenty of them. Short interest in PLUG stood at a whopping 30.4 million shares at the end of March, equal to around 21% of the company’s total market capitalization. For comparison, it had been at around 7 million at the end of last year.
Now that things have settled down, we can evaluate PLUG in a more logical way and assess the possibility of profit in the future. Although I have a natural dislike of trendy stocks that have over reacted to news in the past, I believe that PLUG could be a decent buy at these levels. The Citron report I alluded to was no doubt accurate, as Plug Power has never been profitable, but it seems they missed the point. Plug has been struggling to gain acceptance of their hydrogen power plants for use in forklifts, but Wal-Mart’s decision is presumably only the start. There are several other large companies, such as Proctor and Gamble (PG), Kroger (KR) and BMW that have recently renewed and expanded contracts with the firm. There are also persistent rumors of a tie up with Tesla (TSLA).
The other concern highlighted is that Plug has shown a tendency to dilute existing shares’ value by issuing new ones. The company recently did just that by issuing $4 million of convertible preferred shares to buy out ReliOn. ReliOn had developed an air cooled “stack” design that simplifies the assembly of Hydrogen Fuel Cells (HFCs), but more importantly, the acquisition gives Plug access to the potentially lucrative business of supplying HFC backup power units for cell-phone towers, an area where ReliOn had made significant inroads. Obviously, a company issuing new stock is not attractive to investors, but it has meant that Plug is not currently saddled with a lot of debt, and analysts expect the ReliOn acquisition to become accretive to earnings by next year.
There is then, a long term, fundamental case to be made for the stock, a risky case, for sure, but a case nonetheless. My reasons for liking the stock here, though, are more to do with that short interest I mentioned. If the company has any more good news to tell, then a rapid squeeze of those shorts would be on. Even if they don’t, holding at this level will gradually force them out. Should there be bad news, then most who want to short the stock probably already have and any downside move will therefore be limited.
I am not sure yet if there is a shining long term future for Plug Power, but trading and investing are all about risk and reward. PLUG’s recent stability in the face of broader market volatility suggests that it may have found its correct level for now. If that is so, then the short interest will gradually be reduced, which in turn limits the risk a little and makes it worthwhile seeking the reward.