Small Cap Pulse

Evergreen Solar (Nasdaq:ESLR) Deceivingly Cheap at Current Levels

2008-06-12T09:52:41-08:00

June 12, 2008 – Evergreen Solar (Nasdaq:ESLR) is presenting this morning at Thomas Weisel’s Alternative Energy Conference and we decided to take a look at the stock to determine whether it is timely or not. The stock closed yesterday at $9.15, putting it at a P/S (ttm) of 14.12, which is pretty rich. For example, LDK (NYSE:LDK) is holding a 5.78x P/S (ttm), Sunpower (Nasdaq:SPWR) is at 6.87x P/S (ttm), Yingli Green Energy (NYSE:YGE) is at 2.98x P/S (ttm) and Suntech is at 3.82x P/S (ttm). The leader in the midstream solar market in terms of market cap is First Solar (Nasdaq:FSLR) with a whopping 31.85x P/S (ttm). Granted, the P/S (ttm) metric is backward looking and perhaps Evergreen is getting a premium relative to future expectations.

The stock rallied recently to the $12 level when the company announced close to $1 billion in contracts through 2013. This is a big jump from the $78-$79 million posted over the past 12 months which is the number supporting the 14x multiple. The company has intimated that deliveries for the contracts will start this year, so if we factor a contribution of 5% of the recently announced contracts into our forecasts for 2008, then our P/S (2008) multiple comes in at 7.62x, and we come up with a price target at $16.94, a premium of 85% from current levels. The current market cap is only about 1.11x the contracts that ESLR just announced.

We think the stock should move higher from here and would be accumulating at the current $9.38 level.

Disclosure Note: SCPEditor has no position in ESLR.

BP’s $90 Million Investment in Verenium (Nasdaq:VRNM) Bodes Well!

2008-08-06T09:08:57-08:00

August 6, 2008 – Verenium (Nasdaq:VRNM) announced this morning it is getting an investment from BP PLC, which will help to shore up its balance sheet as well as provide a key value-added partner for its future development efforts. This should provide the Street with a much stronger level of confidence that the company is going to have the staying power to bring next-generation cellulosic biofuels to the markets.

The stock was pounded last month as concerns mounted about the impact of biofuels on agriculture, the relative uncertainty about the success of next generation biofuels, as well as whether support will still be in place for them by the time they are fully market-ready, and in particular, due to the fact that Verenium has been looking for strategic investment for some time now and hadn’t been able to produce much in the way of results.
This morning’s news is a major development. At yesterday’s close of $2.02, the stock is trading about 2.5x sales (ttm), and about 2.11x our forecasted 2008 sales of $75 million. We think with the BP relationship in place, the stock could trade up to a 3x 2008 multiple, which would put the stock closer to $3.17. This would be the high end of our target range, but we think the news should provide a catalyst for the stock to begin trading in this $2 to $3 range in the second half of the year.

We commented a few weeks ago, July 7, when the stock was hitting $1.60 that accumulation was a good strategy for investors that are able to stand the volatility, and the stock bounced off a low a week later of $1.05, but has managed to climb back over $2 leading into this morning’s news on several positive developments, including a Department of Energy grant, a joint development agreement with an Asian partner, and a grant from New Zealand’s Foundation for Research.

We are still accumulating on any market weakness under $2 and are more bullish than ever on Verenium’s ability to withstand the storm and lead the next generation of biofuel companies.

Disclosure Note: SCPEditor is LONG VRNM.

Selling Out of Money Covered Calls on SDPR Gold Shares

2010-03-03T08:58:46-08:00

March 3, 2010 - We are totally bearish on the dollar. Washington has no self-control with respect to deficit spending, and lacks the political will, as well as bipartisanship to craft and pass policy to reduce the current national debt.

Consequently, the dollar, in our opinion is on the verge of losing its ‘safe haven’ status. We totally agree with Nial Ferguson who says the dollar is about as much of a safe haven today as Pearl Harbor was back in 1940.

The greenback is increasingly under criticism around the world as a reserve currency with China leading a steady drum beat to replace it as such. Credit agencies have recently warned that if the U.S. doesn’t get its fiscal act in order, our debt ratings will be reduced. And God knows we our recovery is dependent at this stage on our ability to dress up that debt to look as attractive as possible.

So we are bearish on the dollar. We have been bearish on the dollar for years. Ever since Bush started implementing those tax cut strategies and driving the country out of the surplus he started with. In which case, we have been bullish on gold, and advocate the SPDR Gold Shares (NYSE:GLD)as the easiest and most liquid way for investors to gain exposure.

We advocate being long GLD, and with gold prices tipping closer to 2010 highs (112.85), and 52-week highs (119.18), we think there is an opportunity to hedge against near-term profit taking by writing out of the money covered calls.

Our long-term thesis on gold remains bullish, which is why we remain long, but we don’t see GLD breaking out above the 12-month high of 119.18 for at least another 3-6 months. In which case the June 120’s look attractive which would bring in another $2.40 in premiums basically reducing our cost average by the same amount.

Important Disclosure:

This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Any such offer, if made, will only be made by means of a confidential prospectus or offering memorandum or management agreement. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing. Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment

We Think Markets Are Close to Being Topped out in Near Term - We Like QIDs and DOGs

2009-10-15T11:14:19-08:00

October 15, 2009 – We think the markets are totally overdone at current levels and the risk/reward is leading heavily in the risk side of the equation. To that end, we like the short ETF positions on the Nasdaq and the DJIA – respectively, NYSE:QID and NYSE:DOG.

Here is our rationale:

The markets have been on a tear since March. The DJIA is up 3,560, or 55% while the Nasdaq is up 899, or 71%. While the 100-day simple moving averages are 8.9% and 9.7% below current trading levels.

The markets have been pricing in widening expectations that the economy is stabilizing based on a steady string of ‘less bad’ news. But in our opinion, the news is still bad:

• 9.8% unemployment – in order for the economy to get mark-to-market its job situation to pre-recessionary levels, it would have to add 500,000 jobs per month for the next 16 months. But businesses aren’t investing back into the workforce yet, due to…

• Still tight credit markets – commercial banks are not lending. We looked this morning at commercial loans and the pace of declines in commercial loans is actually accelerating – down 1.1% in July, down 2.3% in August and down 2.5% in September.

• Credit card defaults are still at historic highs, delinquencies are up and home foreclosures still on the rise -RealtyTrac reported this morning that the number of homes in foreclosure rose more than 5% from summer to fall, impacting almost 938,000 properties in the July-September quarter. Foreclosure-related filings are now on pace to hit about 3.5 million this year, up from 2.3 million last year. And with unemployment at 9.8% and expected to rise well into the 10% range into 2010, the outlook for homeowners remains poor.

• Now, the dollar is sliding amidst unchecked debt spending and monetary expansion – the implication here is that erosion in the dollar will usher in inflation.

Against this backdrop, we can’t be bullish. The consumer is the fundamental engine for our economy. If the consumer is in disrepair, the economy will not expand, period. But valuations in stocks are reflecting just the opposite. Valuations relative to forward earnings on the S&P;500 have not been this high in years!

We don’t see where the corporate performance is going to come from given the current state of the consumer. In a ‘healthy’ economy, consumers are expected to spend 97% of their disposable income to support 70% of GDP, while consumer credit has tipped to about 22% of GDP.

Add to the equation the fact that consumers are on the hook for $7.5 trillion of the close to $12 trillion national debt and consumer debt represents about 69% of GDP!

The fundamentals are just not there for growth. But this is exactly the opposite of what the markets have been telling us for the past few months.

As the saying goes, the markets can stay irrational longer than you can stay solvent. Regardless, we think a prudent strategy at this point is to hedge against downside risk and the QIDs and DOGs are, in our opinion, a good hedge.

Important Disclosure: This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Any such offer, if made, will only be made by means of a confidential prospectus or offering memorandum or management agreement. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing. Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment.

FTEK Puts Up About 59% - Suggest Locking in Profit

2010-03-08T07:40:54-08:00

March 8, 2010 – On February 2, we said that while we liked Fuel Tech (Nasdaq:FTEK) we thought the stock could see some further downside as a byproduct of broader market weakness and suggested we would be interested in owning the stock sub-$6. The stock subsequently dropped from the mid-$7 range to the mid-$5 range, and on February 11, suggested selling the September 7.5 puts on FTEK for $2.10. The position is up more than 30% this morning.

Today, those puts are up more than 59%. Our assessment is that if we leave the put positions alone, they will likely expire worthless in September, which would yield a 100% return. On the other hand, we expect the broader markets to remain volatile in the next several months, which could lead to a retracement in FTEK’s stock, and another opportunity to sell puts (see our similar strategy, which has worked out well on First Solar). In addition, in this market, a 59% gain in a little more than a month seems to be more than adequate.

Our advice would be to close at least half, if not all, of the put position, locking in that 59% gain.

Important Disclosure:

New Leaf Tea (NLEF) Expands Whole Foods Store Distribution in Northeast and Mid-Atlantic

2009-10-22T06:45:52-08:00

New Leaf Iced Tea (NLEF) is already in 24 states offering 14 unique flavors throughout the United States. New Leaf (NLEF) is in over 8,000 outlets including well known and established retailers including 7-Eleven, Costco and Whole Foods.

Today, New Leaf (NLEF) announced the expansion into 22 more Whole Foods Stores throughout the Northeast and Mid-Atlantic. Audy Espnial, NLEF’s Territory Manager for Manhattan stated, “New Leaf is on fire in Whole Foods. In a short amount of time, our products have gained significant traction. Sales have been trending upward every week and I have seen stores go from 5 cases to 25 sold every week, all in less than three months. Consumers and staff love our product, want to see more flavors and enjoy our demos. I look forward to seeing New Leaf continue to grow in popularity.”

Look out for New Leaf in your retail outlets and try the product, it’s delicious. Visit their website too, http://www.newleafbrands.com.

Selling Jul 25 Puts on American Superconductor (Nasdaq:AMSC)

2010-02-26T08:02:45-08:00

February 26, 2010 – Yesterday in our commentary we advocated selling July 25 puts on American Superconductor (Nasdaq:AMSC), which would have brought in about $2.45 in premium. Here is our thought process behind the trade:

We like the fundamental story:

• American Superconductor is a leader in growth industries (wind, smart grid) in growth markets (China).

• Tremendous level of success and execution –forecasting 70% earnings growth in FY10 to $1.15/share, $135 million in cash, no debt, forecasted FY10 revenues of $400 million and another $350 million in backlog

• Setting up for new opportunities to drive further growth – Superconductor business (carries more power and reduces choke points on the grid, as well as makes them smart); U.S. Wind market (entering market through China partners and also expected to announce at least one U.S. licensee this year); Offshore Wind (gaining traction here, with installs in the field (water) and developing the massive 10MW Sea Titan (btw – management expects its superconductor technology will help it address key engineering challenges here to provide a competitive advantage at this rating); and Utility Scale Solar (it is already an expert in bringing utility scale wind onto the grid (DVAR expertise), and will use that expertise to transition its core technology to the utility scale inverter market for the solar industry). Each of these is at least a billion dollar market opportunity.

Selling Puts is a Prudent and Disciplined Way to Own Stocks at a Lower Price

• The stock was trading at about $27.50 yesterday when we recommended selling the July 25 Puts for $2.45. If the stock declines between now and July to below 25 and the stock gets put to you, you own it at $22.55 ($1.01B market cap), or at about 3.2x this year’s forecasted revenue, and 84x this year’s forecasted earnings (still a bit expensive here). Against next year’s forecasted revenues and income, a $22.55 entrance point would be about 2.52x FY10 forecasted revenue and 19x FY10 forecasted income.

We think this is an attractive entrance level for the stock. Past performance is no indication of future performance, but the stock ran from about $13 to $43 in the last 10 months and now back to $27-28, on nothing short of good news and execution. We see the pullback here as an opportunity to begin position building. We would obviously like to map out entrance points closer to 10x forecasted income, but that would require a pullback all the way to the $13-$15 level again and we think it would probably take a broader market selloff back to March 09 levels to get us there.

So our strategy, as always, would be to reserve some cash to build on this strategy if the stock drops materially. In the meanwhile, at least we have staked out a path to a position, and we are getting paid $2.45 to do it.

Now, if the stock runs higher then we will trade the short put position itself, either letting it expire and keeping the entire premium (100% gain on the put), or at some respectable return if we choose to purchase the put back to close the position.

Important Disclosure:

Selling Puts on First Solar (Nasdaq:FSLR) - June 100s Look Good - Again!

2010-02-23T21:01:09-08:00

February 24, 2010 – On February 2 we suggested that selling puts on First Solar (Nasdaq:FSLR) was an attractive strategy for the following reasons (see previous commentary):

• We are long-term bullish on the company – market leading position in solar, which continue to believe is a long-term growth industry;

• We would like to be long First Solar at lower levels – selling puts on the stock, at lower prices than the stock is currently trading at results in receipt of premium (price put sold for) to take on the obligation to buy the stock at a lower price in the future.

We recommended selling the June 100 puts for about $10.10 when the stock traded at $108, which would result in either (a) pocketing the premium (or the difference between the premium and the closing purchase price if you choose to buy the stock pre-expiration date) if the stock maintains above the $100 level until the expiration date on the put in June; or (b) getting put the stock at a cost average of about $90 should the stock trade below $100 resulting the it being put to you.

Given the fact that we are long-term bullish on First Solar, and the proposition of getting put the stock at $90 (which would have resulted in buying it at slightly more than 13x FY10 projected earnings and slightly more than 10x FY11 project earnings) is an attractive entrance point (all things being equal), we liked the either-or –scenario, and it paid off if you sold the put, and then bought it back when we suggested that being a good idea on February 18, resulting in a 50%+ gain on the trade.

Well, the stock hit $105 yesterday and we like the strategy again at current levels. The June 100 puts traded yesterday at about $12.50.
We actually sat in on First Solar’s presentation yesterday at the Piper Jaffray Fifth Annual Clean Tech Conference in NYC, and continue to think the company is extremely well-positioned. The stock has been under pressure (as with the solar group in general) due to concerns about Germany reigning in its Feed-in-Tariff, and potentially about the impact of a softening euro on earnings. But the company’s forecasts are, in its own words, conservative.

For example, its guidance assumes spot prices of silicon at $40/kg and it also assumes a sub $1.30 euro price. Meanwhile, it maintains a stellar balance sheet (contrast its $900M or so in net cash vs. the negative $5 billion or so that the next five largest solar companies have), and a 16% market share, with its systems business poised to help compensate against pressures felt by the situation in Germany. We like the stock, and we love it at $87.50, which is where you would own the stock if it were put to you at the $100 put price (assuming $12.50 premium paid).

Important Disclosure:

Suggest Locking in 50%+ Gain on FSLR June 100 Puts

2010-02-18T13:53:15-08:00

February 18, 2010 - Since we suggested selling First Solar (Nasdaq:FSLR) June 100 puts last week at about $10.30 when the stock was dipping to $108, the stock has moved back to $126 and the puts have declined to $4.90, which would mark a 50%+ return on the puts if you close the position.

This is too strong of a return in so short a period of time to pass up, so we would suggest that if you made this trade last Wednesday, you not get too greedy and close.

We think the broader markets have more downside to them than upside at current levels, which, if we are right, would mean downward pressure on FSLR, so there might by an opportunity to make a similar trade again.

After all, we made a similar recommendation back on February 26, 2009 when FSLR had sold off to similar levels and that trade would have worked out well for those making it as well (look it up in our archives).

First Solar Put Strategy Looking Solid - June 100 Puts Up 41% In Week

2010-02-17T07:35:53-08:00

February 17, 2010 - Last Wednesday we suggested that, on a pullback to about $108, First Solar (Nasdaq:FSLR)looked attractive, and a good strategy for taking advantage of the recent weakness in the stock would be to sell the June 100 puts, for about $10.

If you would have sold June 100 puts then, you would be up about 41% on that strategy as of the open this morning.