Bad information costs us all money…
Say you get a hot tip that a company is about to crush an earnings report. You go all in, the company misses, and you’re out big.
Or the opposite happens, and someone tells you a company is about to take a hit, so you short it. Then they get a new contract or the rumor gets disproved and the stock takes off… leaving you holding the bag.
No one likes bad information. But there’s a bout of it going around.
An American Company in China
This week, Citron Research published an extremely bearish report on American Superconductor (NASDAQ: AMSC), a stock I view as a top wind and smart grid play.
While the group laid out several bearish points, only one had any validity at all. And that one is based on a theory that may or may not play out.
Before I get into the tit for tat — and how it could make you a quick gain — you should first understand what American Superconductor does. It’s a technology company that makes electromechanical systems for wind turbines as well as high-temperature wires and power converters that regulate and stabilize voltage for the grid.
And they’ve done well to harness this current high-growth market. But Citron takes another view.
Here are their issues and my rebuttals.
A Story Stock
Citron claims that AMSC is a "classic old-school ‘story stock’… a company with an electric distribution grid innovation" that has "never been monetized."
What they are referring to is AMSC’s high-temperature superconducting wire (HTS), which delivers more power than traditional cables, helping to solve grid and transmission problems with lower costs.
But this isn’t the company’s main product. Not by a long shot. It’s disingenuous to claim that it is.
If AMSC was a story stock — and it isn’t — the story would be about its wind turbine components, and how they are now being installed in 40% of the wind turbines in China, generating hundreds of millions in revenue each year.
No one is investing in AMSC because of its wire. They’re investing to get exposure to the Chinese wind market.
Death Panels for Wind Turbines
Citron also reported that "Miao Wei, vice minister of Industry and Information Technology came out and called many China wind power projects "vanity projects" made the whole industry sit back and give one collective headscratch." They also cited "sandstorms" as detrimental to wind development in China.
This can only be classified as a death panel moment for cleantech.
Citing the words of Miao Wei has little impact in the face of countless positive announcements from Chinese officials that have been backed up with real laws and incentives.
Just this month, Zhang Guobao, head of China’s National Energy Administration, made a media tour touting China’s green credentials. His talking points included:
China’s plan to get 15% of its energy from renewables by 2020 (the U.S. has no such goal);
China’s goal of reducing carbon intensity by 40 to 45% by 2020 (the U.S. has no such goal); and
The establishment of a "Super Ministry" to fast-track clean energy projects.
And that’s without mentioning the $217 billion China will spend on cleantech development in the next five years…
Or the studies showing China will install 3x its 30 gigawatt wind target by 2020…
Or the Renewable Energy Law they just amended, which requires utilities to buy every single drop of clean power generated in the country.
Or the fact that 2009 marked the first time ever that China produced and installed the most wind turbines in the world, with Sinovel (AMSC’s largest customer) moving into the top 5 producers in the world.
So it begs the question, "Who is Miao Wei and why should he matter?"
Relationship with Sinovel
Somehow, Citron also found AMSC’s relationship with Sinovel (the largest turbine producer in China) to be a risk, saying "AMSC’s filings disclose that its Sinovel revenues represent 67% to 76% of its revenues for various periods spanning 2008 and 2009. So investors had better heed the company’s relationship to this one customer… if Sinovel gets a cold, AMSC catches a flu."
The 67% to 76% part is true. In fact, the actual number is 69% of revenue through the third fiscal quarter 2009 came from Sinovel.
This is a blessing — not a problem, since Sinovel seems to be immune to the flu. They just filed for an IPO that will bolster their dominance in China and facilitate global expansion. The company has already become a top 5 global turbine producer and says it’s seeking the top spot in five years’ time.
More business for Sinovel means more business for AMSC. In addition to 40% Chinese market share, they’ve already got a U.S. project lined up.
When did it become a bad thing to do business with the most dominant company in an industry?
What’s more, AMSC does have other customers, but since Sinovel has been so dominant, most of the revenue has come from them.
But its other customers are growing quickly, and include Hyundai, XJ Group, CSR Zelri, Ghodowat, and Dongfeng.
Having already secured the alpha dog, AMSC will have no problem getting other customers in Asia.
CEO Selling Shares?
Citron goes on to report that "CEO Greg Yurek alone has sold over 375,000 shares just this year, and consistently bangs out his options as they are earned, retaining fewer shares than he’s sold just during 2010."
Yurek was forced to exercise those options and sell stock as part of his contract. The dates of the sale were predetermined.
A 60 P/E?
This is the most egregious of them all.
Citron reports that "after reporting huge losses for years, the best they have been able to put up in 2009 is an 12c qtr., a run rate which prices the company for a 60 P/E."
I can only hope this is an oversight.
Here are the company’s actual earnings per (EPS) share for the past three quarters:
June 2009, $0.12
September 2009, $0.19
December 2009, $0.20
Those last two are certainly higher than $0.12. And the estimated earnings for the next quarter are $0.17 per share, which would give the company full fiscal year earnings of $0.68 per share.
With a current share price of $26.50, that works out to a price to earnings (P/E) ratio of 38.87 — much less than Citron’s 60.
The bearish report concludes: "when in doubt, Citron advises readers to ‘follow the money.’ The furious rate of CEO Yurek’s insider selling should cause any investor to ask why they should be on the other side of his trade."
Of course, that’s bogus advice. We’ve just learned that the CEO wasn’t dumping shares, but rather doing so as part of a predetermined contract.
Yes, follow the money. But follow the $700 million in orders AMSC has already received from Sinovel. Follow China’s 30 GW wind target for 2020. Follow $217 billion China will spend on cleantech in the next five years.
But don’t follow manufactured research with clearly bearish intentions.
Call it like you see it,
P.S. This is the type of quality research and analysis you get in our premium publications. In Alternative Energy Speculator, we’re long AMSC with a $40.00 price target. And we played it two different times in 2009 for 27% and 59%.
Better for you, this is one of three companies I think could get a big boost from a high-level energy policy meeting taking place later this year. This annual event has been driving certain stocks higher for more than a decade, and if you want in on it this year… you’ve got to read this report before the meeting happens.