Is Composite Technology Corporation Still a Buy?
by Tom Konrad
When I asked, Alternative Energy Stocks readers overwhelmingly wanted me to take another look at Composite Technology Corp. (OTC BB:CPTC.OB) I've discussed CPTC several times over the last year, and consider it my most speculative pick in electricity transmission and distribution. True to the nature of a speculative stock with no current earnings which is still trying to establish markets for its products, the stock price has been all over the map.
The reader interest is doubtless due to the recent sharp decline since mid January. I personally sold a portion of my and client positions when the stock was in the $1.75-$2.00 range, and repurchased it for some accounts around $1.30 (including my own.) These accounts are currently showing a loss of around 30-35%, not counting the gains taken last year.
I actually have not been watching the recent decline, but seeing the stock at $0.82 today makes me wonder: should I buy more? Should I take a tax loss for those accounts that could use one? Has something happened to make the stock look worse, or is the current decline just the effect of falling markets on what has always been a very speculative stock?
Those Pesky Banks
Two weeks ago, I was talking to a friend who acts as a CFO for small wind developers. Unprompted, he mentioned that banks would not finance CPTC's DeWind turbines because of their lack of track record, which is a gigantic barrier to incorporating them in a US windfarm. My friend made the same comment about AAER Inc [TSE:AAE], a company which AltEnergyStocks Editor Charles Morand bought last year (He still owns it, and says he bought if for other reasons, but is not overly concerned about turbine financing.) In general, I have not been paying nearly as much attention to CPTC's wind division, because I'm more interested in the transmission play, and I had assumed that, given the long backlog for turbine orders from major manufacturers, DeWind would find places to sell as many turbines as Westinghouse can manufacture for them. This financing difficulty is not news to investors who have been following DeWind, but it raised the question of how many turbines they will be able to sell until they build more of a track record in such places as the Czech Republic.
However, since this is not news, it can't account for the stock's decline. CPTC does seem to be making accepted progress towards getting these turbines tested and certified, which should do something to ameliorate banks' reluctance to finance DeWind turbines. They are currently waiting on two reports from the National Renewable Energy Laboratory and the Department of Energy, as well as negotiating with insurance companies which would insure the turbines to allow bank financing.
Uncertainty among investors as to the results of the DOE and NREL certifications are likely to be the cause of some of the decline. This sort of uncertainty can feed on itself in down markets like the one we are currently experiencing, but that leads to buying opportunities for brave investors.
Latest Earnings Release
The Feb 11 December quarter earnings release certainly provides no explanation for the recent decline (although the decline began a full month before the release, so it would require the leak of insider information if it had.) With revenues having doubled from the 2006 December quarter, and up 40% from the previous quarter, the expectation would be that the stock would also be up. Both the DeWind and ACCC Cable divisions seem to be making headway towards broader market acceptance.
In contrast, operating cash flow for that quarter was almost $14 million in spending, mostly due to a large increase in inventory. With cash on the books of only $11.5 million, their balance sheet looks weak, so failure to convert those inventories to cash could lead to a liquidity crunch in the coming quarters. This might lead to a dilutive stock offering, which would probably be bad for current shareholders, unless it were in order to finance an increase in orders.
The company currently does not anticipate needing new cash until June, but seems determined to avoid further dilution if at all possible, mostly by relying on customer payments to fund inventory growth. This adds both uncertainty, but also means that any gains are likely to be much more profound.
I like what I see. The company has made considerable progress over the last year, and the stock is staying at the same price. As the ACCC conductor begins to make a significant contribution to the bottom line, and its turbine certification continues as expected, the company seems likely to maintain current revenue growth rates. At some point, barring too many unforeseen hiccups, investor greed sparked by rapid revenue growth should overcome uncertainty.
UPDATE: Shortly after publication, two readers pointed out that I'd missed the most likely cause of the sell off: selling by Millenium Partners, to pay an SEC fine. All the more reason to buy, if the reason for selling has nothing to do with the company. One of these readers gave the following detailed reasoning:
One issue that I noticed you did not cover is the selling by Merriman (Englander) of Twelve million shares to cover a 148 million fine by the SEC. This can explain the dropoff in share price. The market maker that handled the sale of the shares is ARCA, I believe. If you notice, when ARCA appears to be off the ask, the stock has a tendency to go up.
Good enough for me. I just bought some more.
DISCLOSURE: Tom Konrad and/or his clients have long positions in CPTC. Charles Morand owns AAE.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.
|Tweet||Add to Flipboard Magazine.|