3 Stocks That Will Benefit from the Next Big Policy Shift in Congress


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To make money in stocks, you need to tie together various threads of information to see what it might mean for your investments. Right now, a pair of disparate data points has caught my attention: rising oil prices and a trio of unloved stocks that may really benefit from it. Tie them together, and you may be looking at a pair of the most profitable trades of 2011.

The oil vs. gas conundrum

A clear theme emerged in 2010: oil prices rose ever higher while natural gas prices have been stuck in neutral. Oil now stands at $90 a barrel while natural gas trades for less than $4.50 per million per British thermal units (MMBtu). That's a 20-to-1 ratio. Yet researchers at Rice University note that the ratio wasn't always this stark: Historically, the two energy sources were valued at around 10-to-1 and when natural gas prices spiked a few years ago, the ratio fell to 6-to-1.

The ratios are very important. Adjusting for the relative energy content for a gallon of oil versus an equivalent amount of natural gas, the 10-to-1 ratio means that powering a car or truck with gasoline was cheaper than with natural gas. With the current move to a 20-to-1 ratio, natural gas is notably less expensive than gasoline. If oil prices keep rising, as many suspect, natural gas will become even cheaper.

Pickens has friends
A few years ago, legendary oilman T. Boone Pickens implored policy makers   to pave the way for more natural gas-fueled cars. His plea largely fell on deaf ears. Then again, he made that push when the 10-to-1 oil-to-gas ratio was in place. These days, he's got plenty of company, starting with foreign-policy hawks that would love to see the United States reduce its dependence on Middle Eastern oil. Environmentalists are on board as well, noting that natural gas, while not as clean as wind or solar, still burns cleaner than oil-based fuel.

With support from the left and the right, and with theeconomics never more compelling, the timing appears right for Washington to finally alter our energy policy to boost the number of vehicles on the road burning natural gas. Congress tried to generate legislation on this front last summer, but a chaotic environment forced the issue to the back-burner. Industry watchers expect the legislation to be raised again this spring. The odds of success have improved: as noted earlier, theeconomics have improved and Congress is looking for the few issues that have true bipartisan support.

Out of favor
I hate to recommend stocks that are already doing well. As fate would have it, my three favorite plays on the trend have seen their share prices fall sharply recently: Clean Energy Fuels (Nasdaq: CLNE ) trades for half of its 52-week high, while Westport Innovations (Nasdaq: WPRT ) and Fuel Systems Solutions (Nasdaq: FSYS ) hav e each lost roughly 30% of their value in the past three months. Part of the downturn in these names can be attributed to the frustratingly slow pace in which Washington operates. Supporters of these companies have thrown in the towel -- which is precisely the time to look for value.

Westport Innovations is a leading player in the natural-gas fueled truck market, partnering with major truck engine manufacturers such as Cummins (NYSE: CMI ) , Kenworth, Peterbilt, and Volvo to modify traditional truck engines to run on natural gas. Demand has been strong: Westport's sales have risen from just $34 million in fiscal 2006 to a projected $245 million in fiscal 2012. Trouble is, the company remains unprofitable and quarterly results remain lumpy. That's why you should be prepared for the occasional bad quarter yet to come. Until legislation is passed,shares may stay in the mid-teens.

Clean Energy Fuels, which is backed by T. Boone Pickens, has taken a different approach. The company has built a network of natural gas re-fueling stations that could see rising traffic as more natural gas-powered vehicles are on the road. Yet, the real focus for the company has thus far been on corporate and government fleets, many of which have already made the move to natural gas. An expanding network of stations is expected to boost sales roughly 50% in 2011 to around $300 million, finally enabling the company to break even. Congressional legislation would help to ignite thisbusiness model , and expansion plans could take sales to $500 million within a few years.

Fuel Systems has the most geographically diversebusiness model , selling components that go into modified engines in Europe and South America as well, where the natural gas-powered vehicle industry is farther along. In contrast to its peers, the company is solidly profitable and trades for around 16 times projected 2011 profits.

Action to Take --> None of these three stocks are on the cusp of anearnings break out. That's why you've got time to sit and listen to their 2010 fourth quarter conference calls. Each company is likely to discuss the road ahead, with or without a lift from Congress.

In my view, the odds that Congress will indeed act are on the rise. And legislation would quickly propelshares higher, so you don't have the luxury of waiting for proposed legislation to be announced. Instead, these shares already reflect a negative legislative outlook and have likely found a floor at these depressed levels. A lack of legislation likely implies modest upside, while any legislation would give you a quick gain. I like that risk and reward.

-- David Sterman

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Investing , Commodities , Investing Ideas
More Headlines for: CLNE , CMI , FSYS , WPRT

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David Sterman

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