One of the most obvious signs of any industry-wide bubble is when there are industry-wide equity raises. Often the best time for a management team to raise money is when their stock prices are up big at unsustainable levels. What's a better time to raise money than to do so with overvalued stock? No sane management wants to raise money and dilute the value of its own stake with undervalued stock. This is exactly what I'm seeing across the board with many of the green energy stocks I follow. This may be a sign of at least a short-term top and possibly of a bubble burst close to popping. However, each individual company raising money should be evaluated on a case by case basis as sometimes when a company raises money it's actually a bullish sign even if it's bearish for many of its peers. The following is a list of five green energy stocks I follow, details about their financing, and how I would play them.
1. FuelCell Energy (FCEL)
On June 20, 2013 FCEL announced the pricing of senior unsecured convertible notes at 8% interest due in 2018. The total raise was $38 million. They are convertible into stock at a fixed $1.55 per share. Normally I might take this is a bearish sign that would put pressure on the stock. However, the price of FCEL at the time of announcement was $1.36 per share. This means the convertibles were sold at a 14% premium to the current stock price. FCEL is currently trading at $1.17. If FCEL merely got back to the $1.55 per share price the financiers felt was a bargain, that's a 32% premium to the current share price. It seems the sell-off since the financing announcement was overdone. The dilution is only around 10-15% compared to the current outstanding share base while providing around a year's worth of capital based on the annualized net loss of last quarter. As stated in my article FuelCell Energy's Path To Profitability, I believe FCEL is on the path to profitability long before that time so I believe this is the last piece of the puzzle that will get it there. FCEL I believe is a buy at this level.
Direct FuelCell power plants are generating ultra-clean, efficient and reliable power at more than 50 locations worldwide. With more than 300 megawatts of power generation capacity installed or in backlog, FuelCell Energy is a global leader in providing ultra-clean base-load distributed generation to utilities, industrial operations, universities, municipal water treatment facilities, government installations and other customers around the world. The company's power plants have generated more than 1.6 billion kilowatt hours of ultra-clean power using a variety of fuels including renewable biogas from waste-water treatment and food processing, as well as clean natural gas.
2. SolarCity (SCTY)
On June 18, 2013 SCTY announced it will raise between $175 million and $201.25 million in a convertible senior notes offering. The price of conversion has yet to be determined, which leaves open the risk of a potentially large discount to the market price (which is common). The dilution versus current market cap suggests somewhere between 5% and 10%, which isn't too bad, but this adds to the concerns I wrote about in my June 5 article on SCTY. The stock price is still up over 300% since its IPO, and the last thing SCTY longs need short term is more potential share-selling pressure. As detailed in my article, on June 10, 62 million shares were unlocked. The valuation of SCTY versus its First Solar peer suggests a wildly overvalued stock as it is. It is mysteriously no longer going to report backlog, Copperfield Research has recently released a 30-page rather scathing bearish report. I'm not going to pretend that I have double-checked and verified all 30 pages, but if even just some of it is accurate, it could spell trouble for SCTY. The report can be found here. If I were long SCTY, I would take profits and exit. I am not currently shorting SCTY due to the extreme volatility and risk associated with that, but I think shorting SCTY with a small amount of capital perhaps in put options could yield very positive results. I may initiate a short position this week.
SCTY describes itself as a leading provider of clean energy in the U.S. The company disrupted the century-old energy industry by providing renewable electricity directly to homeowners, businesses and government organizations for less than they spend on utility bills. SolarCity gives customers control of their energy costs to protect them from rising rates. The company offers solar power, energy efficiency and electric vehicle services, and makes switching to clean energy easy by taking care of everything from design and permitting to monitoring and maintenance. SolarCity currently serves 14 states and signs a new customer every five minutes.
3. First Solar (FSLR)
On June 18, 2013 FSLR announced the closing of its common stock offering at $46.00 per share of nearly 10 million shares. Although this was right around the price the stock was trading that day, it had been previously priced on June 12; the day after FSLR was trading at $52 per share. It represents dilution of over 10%. With this raise and the stock price decline, FSLR is now actually trading at less than book value per share. I do believe it was a good move by management, but I also don't see this as a bullish sign. If the quarter that ends 12 days after the closing of this offering was going to be surprisingly good, management could have waited to do the raise at what would presumably be higher stock prices (and less dilution). Insiders have been doing some selling during the quarter as well. FSLR missed earnings estimates rather bad last quarter, and analysts have been steadily reducing their estimates since. I would sell FSLR and possibly short it especially ahead of the next earnings report.
First Solar is a leading global provider of comprehensive photovoltaic (PV) solar power systems, which use its module and systems technology. First Solar's integrated power plant solutions deliver an economically attractive alternative to fossil-fuel electricity generation today.
4. Tesla Motors (TSLA)
TSLA has been lately trading like a magnet around the $100 per share mark, falling back toward it soon after it rises above $100, and rising back toward it when it dips below $100.
On May 15, 2013 TSLA announced it was raising up to $850 million from equity offerings and convertible senior notes. On the bullish side, TSLA claimed this is an anti-dilutive measure:
In connection with the offering of the notes, Tesla intends to enter into convertible note hedge transactions and warrant transactions which are generally expected to prevent dilution up to 100% over the offering stock price.
Also, its CEO intends to put up $100 million personally:
In addition, Elon Musk, Tesla's chief executive officer and cofounder, intends to purchase shares of common stock at the same public offering price for an aggregate purchase price of $100 million.
It then went on to raise approximately $1 billion total this round and paid back its outstanding department of energy loans a full 9 years early. The pricing of the equity was at around $83 per share, roughly the price it was trading at the time. Based on all this, it would be a difficult task to paint this money raise as unfriendly to shareholder interests, and even more so quite bullish that the CEO would put such a high personal stake into it. The only negative I can think is to wonder why management bothered to pay back a loan by using money raised from common stock if it felt the common stock was undervalued. Debt is normally more favorable to companies than selling stock when they feel their stock is undervalued.
Despite TSLA's fantastic run up, it continues to trade at a tiny fraction of the market cap of General Motors (GM) and Ford (F). While obviously those two companies have multitudes higher sales, TSLA is already showing relatively very high gross profit margins of 17%, more than double the quarter before. TSLA has guided for 25% gross profit margins by year end, a level GM and F could only dream of. In the long term, levels of profitability, not sales, is what ultimately determines valuation. There's no reason to think this young car company won't additional improve on that 25% starting in 2014 and beyond. TSLA still has a long ways to go before it can surpass GM and F on the bottom line, but its growth on its way there should certainly command a higher multiple.
If I were to take a position in TSLA in light of the long-term fundamentals and this equity raise, I would do by going long TSLA.
5. Revolution Lighting Technologies (RVLT)
RVLT is a little different from the rest of this list. Although RVLT has yet to announce an equity raise recently (other than a 1.5 million "stock incentive plan" for employees), I strongly believe RVLT is any day away from such. I detailed why in my May 30, 2013, article, Short Revolution Lighting Ahead Of The Next Equity Raise:
RVLT has a history of equity capital raises. As of March 31, it only had less than $6 million left in the bank while it burned over $5 million in cash from operations. That would suggest RVLT could be broke as soon as July. With the share price up so high and the cash on hand down so poorly, one should expect another capital raise possibly at a large discount to the current share price, which could serve as a short-term catalyst for a hard sell-off. Add to that past convertible financing deals such as this one are sitting on massive paper profits (if the investors are still holding), and there is quite an incentive to take profits. Finally, in its May 15, press release, the CFO mentioned "We believe we have adequate resources to meet our cash requirements in the near future as we continue to invest in the growth of the company." Translation: near future only, which would be through to July or so. It needs to raise money, and if the past is any indication it won't be on current-shareholder-friendly terms.
Now that July is almost here, RVLT is no doubt getting thin on cash. Expect an equity raise at a discount to market literally any day. RVLT tends to sell off in the days following these announcements so I believe shorting RVLT now will prove to be a viable strategy, even though is certain bares the risk of further stock price rises in the meantime as any positive news from RVLT tends to be received favorably by the market the last few months.
Revolution Lighting Technologies is a leader in the design, manufacture, marketing, and sale of light emitting diode [LED] lighting solutions focusing on the industrial, commercial and government markets in the United States, Canada, and internationally. Through advanced technology and aggressive new product development, Revolution Lighting has created an innovative, multi-brand lighting company that offers a comprehensive advanced product platform. The company goes to market through its Seesmart, Lumificient and Lighting Integration Technologies brands, each of which has an extensive line of high-quality interior and exterior LED lamps and fixtures that produce immediate energy savings and a rapid return on investment. Revolution Lighting Technologies markets and distributes its product through a network of independent sales representatives and distributors, as well as through energy savings companies and national accounts.
In summary, if forced to take a position in each, I would go long FCEL, short SCTY, short FSLR, long TSLA, and short RVLT. With all, I would pay close attention to the news and developments and adjust my positions accordingly. I wish good fortune to all.
Additional disclosure: I may enter a short position in SCTY over the next 72 hours.