Fuel Cells: "...And Yet We've Just Begun..."

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If you follow markets, I’m sure it hasn’t escaped your attention that there are a few small companies, all in the same field, that have quite simply been on fire in the last couple of weeks. The field is fuel cells and the companies are Plug Power (PLUG), Ballard Power Systems (BLDP) and Fuel Cell Energy (FCEL). When I say “on fire” I mean that all three stocks yesterday traded at triple their value just one short month ago.

Call me an old cynic if you will, but this usually makes me suspicious; I have seen far too many people caught up in “irrational exuberance” of one kind or another to not view such moves with a jaundiced eye. Usually a jump like that is the result of over-hype of some kind; sometimes a real “pump and dump” scheme and sometimes just over optimism and the natural overshoot that market momentum brings. Just occasionally, however, such a move is justified, and that could well be the case here.

To understand why, we must understand what fuel cells actually are. They are free standing power plants that produce electricity from a chemical reaction. They come in a range of sizes, from small cells used to power forklift trucks to very large installations providing backup power to more conventional power plants. They can be powered by a range of fuels, with hydrogen and natural gas being the most popular.

So, why the sudden explosion in the stocks? Investors, it seems have come to the realization that, after years of depending on Government subsidy for survival and still losing money, these fuel cell companies have a chance of making their own way in the world. The depressed price of natural gas due to the shale boom is part of it, as is the increased understanding of the importance of a backup energy source in the event of a disaster, but neither of those fully explain the recent jump, nor are they the reason that I believe these stocks are still worth buying, even at these levels.

Gas is a commodity with a variable price and, while supply has increased massively as shale fields have been exploited, demand is also increasing gradually as more applications are found for the now inexpensive fuel. This is Adam Smith’s famous “invisible hand” at work and anybody who understands markets knows that natural gas prices will inevitably revert to the mean. Cheap gas is not a reason to buy into fuel cells.

There have been a few natural disasters and weather events over the last few years that have highlighted the desirability of an independent power source in certain situations, such as to keep cell phone towers operational and coverage available after a disaster, but nor is that reason to invest at these levels. It has renewed interest in the technology, but that has never been in short supply. Until recently the problem that all of the companies in the field had was turning that interest into orders and therefore into cold, hard cash.

What convinces me that the fuel cell industry really does have a bright future is that that process is now beginning. The big move started a couple of weeks ago when Wal-Mart (WMT) announced that it would be placing an order with Plug Power for hydrogen powered battery units for their forklifts. The support of the king of logistics is of course significant, but so is the intention of existing users such as P&G (PG) to re-order. The corporate world has embraced the new technology, and history tells us that where WMT goes, others will likely follow.

PLUG and their fuel cell stack supplier BLDP are the direct beneficiaries of that, but the more widespread acceptance is beneficial to the industry as a whole. FCEL, who are more focused on larger units for power plants and cell phone towers, reported earnings that merely met expectations after hours last night, but the stock still gained over 7.5% in late trading. Investors are seeing the enormous potential here now that even fairly conservative corporations are jumping on board.

It is hard to pick any one particular winner here, so splitting an investment between PLUG, BLDP and FCEL may be the best bet. One thing to consider; PLUG is due to announce earnings on Thursday. If FCEL is anything to go by, then just meeting the expected $0.08 per share loss will cause a pop, so while this would usually cause me to suggest a “before and after the number” average, that would only make sense here for the ultra cautious.

The feeling is that, whatever PLUG announces, the industry has an amazing future that is just beginning to take shape. When market sentiment is that strong, gains can continue for some time, regardless of backward-looking announcements. The rise in fuel cell stocks over the last month has been spectacular, but it could be that, in the words of The Carpenters “We’ve only just begun...”



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



This article appears in: Investing , Investing Ideas , Stocks , Technology

Referenced Stocks: PLUG , BLDP , FCEL , WMT , PG

Martin Tillier


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