Just a few weeks ago, I was looking at
a group of stocks
that -- on the surface at least -- looked like they had solid
potential upside, perhaps as much as 100%.
Well, one of those stocks stuck in my craw.
I decided to look more deeply at the prospects for
Maxwell Technologies (Nasdaq: MXWL)
, and after further review, I now think a 100% potential gain may
just be the start. I rarely go out on a limb and predict 200% or
even 300% upside for a stock, but that's what Maxwell looks like to
Lots of juice -- right when you need it
To help understand why Maxwell's technology position is so
compelling, a quick course in electronics is helpful.
capacitor is a device
used to regulate the flow of energy, whether between various forms
of current (alternate or direct), in a power source, or to
stabilize the flow of voltage. Capacitors are also used to store
energy, as they can quickly release lots of juice when needed
(unlike a batteries, which can store a lot more energy but releases
that energy more slowly).
Maxwell makes "ultracapacitors," which can pack in much more
energy than traditional capacitors, opening up the door to many new
applications for a seemingly old technology (whose roots go back to
1754). These devices, which can be charged and discharged in
hundreds of thousands of cycles, can be used in areas where
traditional batteries can't do the job. (Maxwell also makes
traditional capacitors as well as other micro-electronics, though
those products now account for just 35%-40% of sales.)
Although ultracapacitors were invented by
nearly a half century ago, the company struggled to make a real
dent in the electronics/energy storage
. As recently as 2005, the entire global market for ultracapacitors
was estimated to be just $250 million. Back then, Maxwell
controlled just 5% of the market, equating to about $12 million in
ultracapacitor sales (or roughly 25% of the company's total sales
base). Since then, ultracapacitor prices have been steadily
declining, opening up opportunities for many new price-sensitive
Consider the modern automobile. Many new cars come with a
"stop-start" feature that cuts the engine at a red light to save
gas. You would quickly wear out a battery if it were used so
frequently to provide energy to a starter quickly. Instead, many
auto engineers are using ultracapacitors to do the job.
Other examples of ultracapacitor use:
• The newest generation of light rail systems uses
ultracapacitors to provide the quick burst of energy required to
get trains moving from a standstill.
• Utilities like to install ultracapacitors at wind-farm
installations because they operate turbines even when the power
• In Japan, the country's largest trash hauler has begun
using Maxwell's ultracapacitors in its garbage trucks, which makes
them operate a lot more quietly as they roam the streets in the
• In China, more than 500 hybrid buses now use
By the fourth quarter of 2011, Maxwell's ultracapacitor sales
had grown for seven straight quarters. Yet in the first quarter
of 2012, the company hit a speed bump. Sales of $39.2 million
trailed forecasts by roughly $1 million, and the year-over-year
sales growth rate slowed to just 11%, the lowest level in five
years. Also, management noted that second-quarter sales would
also be about $40 million (representing just 8% year-over-year
growth). The reason: European buyers decided to postpone orders
until the Greek crisis had abated.
Management noted that sales would still rebound to the upper
$40 million range in the third quarter and exceed $50 million by
the fourth quarter. But some investors wondered if it might take
longer for growth to return, and quite suddenly, a rising growth
stock was no longer in vogue.
At this point, the stock price clearly reflects expectations
that business will remain muted for the rest of 2012. Yet
management insists that customers have simply been deferring
orders for a few quarters and not canceling them. They note that
the sales pipeline of new business wins remains near record
And they're backing that bullishness up with their own funds.
Since late April, insiders have been buying stock at ever-lower
levels. In the subsequent six weeks, four insiders snapped up
more than $500,000 (on a collective basis).
Will Maxwell suddenly pivot and deliver great quarterly
results for the June and September quarters? Probably not. Will
sales grow more than 20% next year (to around $220 million) as
analysts currently expect? The weak global
may make that difficult and it may be safer to think about 5% or
But it's clear that Maxwell's long-term opportunity with
ultracapacitors remains quite robust. And trading at less than
$7, valuing the whole company at under $200 million (or less than
projected 2013 sales), this stock is just too cheap to pass up.
The Downside Protection -->
Maxwell is expected to deliver quarterly results in early August,
at which time management may again lower guidance.
fell as low as $6.13 in late June, at which point bottom-fishers
stepped in and boosted shares by about 10%. The $6 level does
indeed look like a floor for this broken-down, high-growth tech
Upside Triggers -->
Then again, management may not take guidance down any further.
After all, Maxwell has been issuing -- and meeting -- fairly
robust guidance for several years, and any quarterly caution has
typically been a short-term event. If Maxwell simply reiterates
forward guidance, then shares could post a powerful snapback
It may take 12-18 months for Maxwell to resume its growth
trajectory. There's a great deal of
in this model (analysts currently say earnings per share could
double to $0.50 in 2013 on 20% sales growth). By 2014,
earnings per share (
should exceed $0.60 and perhaps approach $0.75. I think this
stock will eventually trade up to 30 times the low end of that
forecasted range, or $18, which is more than 250% above current
levels. In fact, $18 was the average price for this stock over
the course of 2010, and there's no reason this stock can't
revisit this level some time in 2013.
Action to Take -->
I will buy 800 shares (or roughly $5,400 worth) of Maxwell
Technologies 48 hours after you read this. I also suggest
investors put in a stop loss at $6, in the event a market rout
sucks this stock down with the pack, though I will not be
deploying a stop-loss myself. Shares can be bought under $10.
To free up funds for this purchase, I will be selling my
350-share position in
Ligand Pharma (Nasdaq: LGND)
, which I discussed
in this note
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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