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Summary

  • PLUG is a different game than other stocks right now.
  • The game is more or less a Keynesian beauty contest.
  • It is not right now irrational for Plug longs to be playing this contest.
  • It will become very irrational in the future for Plug longs to play this contest.

Perhaps no other stock in the last few weeks has provided more stock market entertainment than Plug Power. The wild price action and the violent Seeking Alpha debates have been terrific theater. I do want to say at the outset that I consider the share price of Plug to be overvalued and that I have shorted Plug via borrowed shares and also options on the three recent occasions when it has popped, with good profits. I have no hostile feelings toward the Plug bulls. I simply believe them to be mistaken about the future prospects of this company.

One issue, however, that continues to baffle the PLUG bears and that I think is fascinating is why the price of this stock has not been falling now that many day traders seem to have (at least momentarily) lost interest. How is it possible for a stock to continue to defy gravity in the unreal ways that Plug is doing when its P/S ratio is greater than 17, it has continually demonstrated its willingness to dilute shareholders, and its CEO has behind him a history of broken earnings promises? Do the people who are sustaining this stock truly believe in the Plug narrative that has been envisioned by CEO Andy Marsh?

It will be my contention in this article that many of the Plug longs who are sustaining the price of this stock do not in fact believe the fuel cell expansion story. At the same time, however I do not think that they are necessarily behaving in a way that is irrational. In fact I think that they are being incredibly rational, given their beliefs about the nature of the game that is being played right now.

Lord Keynes once described the stock market - at least certain aspects of it - as a beauty contest. In the contest that he envisioned, the contestants are required to identify, from a set of photographs of people, the one who they consider to be the most beautiful. But the participants in the contest only can have a chance of winning if they happen to choose the photograph that the other contestants picked most frequently. So the individual contestant, instead of choosing the photograph of the person who she actually considers to be the most beautiful, feels compelled to choose the photograph of the person who she thinks the most other people will choose as the photograph that the most others will choose.

In the beauty contest of the kind that Lord Keynes described, the fundamentals of beauty do not matter. It does not matter who the individual contestants consider to be the most beautiful. All that matters are the expectations that the contestants have about the expectations of their fellow contestants.

Something like this, I think, is going on right now with Plug Power. The incredible and widespread optimism among the stock-buying public about the prospects of this company are only matched by the incredibly small amount of knowledge among the stock-buying public about the details of fuel cell technology. Most participants in the Plug game seem to be almost wholly dependent upon the experts in this area. The longs have been citing underwriter Cowen and an optimistic report by the DOE. The shorts have been citing industry experts long hostile to Plug's vision - and when one of them says, for example, that it requires platinum and that the platinum is prohibitively expensive for fuel cells ever to be able to work outside of a rather narrowly-confined materials and forklifts business, the shorts have followed.

In circumstances in which no one in the general stock market public really seems to know much about the product in question - in this case, fuel cells - and no one really seems to know with much certainty about whether the product in question is in fact an economically feasible technology, it is easy for the stock of the company that makes that product to become unhinged from the realities on the ground. And the price action of the stock becomes no longer tied in any serious way to the product itself. It becomes instead a Keynesian beauty contest. Basically, I think, there are a lot of people out there who do not themselves think that fuel cells will hit it big. But they do think that there are a lot of other people who think that fuel cells are going to hit it big. And they purchase equity in Plug Power on this basis. Many have been successful so far in employing this strategy - they know, at least implicitly, that for the time being the stock is behaving like a Keynesian beauty contest.

But if and when the Plug longs come to the conclusion that the other Plug longs do not believe any longer that fuel cell technology will hit it big, I think that a rapid exit will result. My own view is that it will at that time be a crowded theater in which shorts will control the exits - if the shorts choose to take profits at that time, as the stock falls, the longs will find purchasers to minimize their losses. But if the shorts hold on until the stock falls to $4, $3.50, $2, or less, that might be a very difficult day for longs. At any rate, in the meantime I'm just enjoying the theater and trying to get profits from the short side when I can.

Source: Plug Power: A Keynesian Beauty Contest