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
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
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:
trades for half of its 52-week high, while
Westport Innovations (Nasdaq:
Fuel Systems Solutions (Nasdaq:
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
, 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
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
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.
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