Betting on Valence Technology: Huge Upside Reward

| About: Valence Technology, (VLNCQ)

After my December 10, 2010 article about FuelCell Energy (NASDAQ:FCEL), in which I stated my belief that the company may offer huge upside reward, I have been asked what other alternative energy plays might offer a 100% or greater return in the near future. Since my FCEL article, the stock has gained around 50% in 8 trading days. After researching, I believe that Valence Technology (VLNC) may generate the same rewards.

Valence develops, manufactures and sells dynamic energy systems utilizing its phosphate-based lithium-ion technology. The company engaged in the development of lithium iron magnesium phosphate dynamic energy storage systems. In November 2009, the company introduced a Revision 2 of its U-Charge Lithium Phosphate Energy Storage Systems. In addition to the U-Charge family of products, the company offers the materials, cells and systems. The company operates in five markets: motive, stationary, industrial, military and marine. The company is enabling efficient transportation solutions from all-electric and hybrid personal transporters to commercial delivery vehicles and mass transit buses. Stationary Energy Storage Systems are designed to provide electrical power to systems during instances of power outages.

Valence stands to gain some major orders in 2011 from customer Smith Electric Vehicles, who just announced on December 23, 2010 that the American maker of all-electric trucks will purchase its United Kingdom-based parent company, Smith Electric Vehicles U.K. in January. The company is eyeing Germany and France, countries whose governments have embraced renewable energy and electric vehicles. The company noted:

First, we’ll have global purchasing power for a combined volume of key components like batteries. We had technical alliances before, but negotiated separately on these things. With this deal, we can leverage global buying power.

Smith Electric customers Staples (NASDAQ:SPLS) and Frito-Lay are purchasing a combined 217 vehicles for local distribution, and the government is considering Smith Electic for a 100-vehicle fleet as well. Smith Electric recently announced that they were exceptionally pleased with the performance of Valence batteries, stating that they will last more than 10 years at more than 80% capacity.

On August 2, 2010, Valence announced a purchase order from Smith Electric Vehicles U.S. to deliver $13 million of energy storage modules for Smith`s line of all electric commercial trucks through the remainder of 2010.

On September 9, 2010, Valence announced the signing of a multi year supply agreement with Wrightbus, the United Kingdom's independent supplier of hybrid buses for public transportation systems. Building on a relationship between the parties since 2005, this agreement establishes Valence as the battery supplier of choice for Wrightbus` future hybrid product range. With multiple Valence-powered Wrightbus hybrid buses already on roads in the U.K. and Ireland, this new agreement secures the relationship between the two companies through 2016. Valence expects this initial contract to generate between $19 million to $24 million in battery sales.

Needham & Company analyst Michael Lew has a current buy rating on Valence, he believes the company is undervalued, and recently raised his price target to $3 from $2 on December 13, 2010. Needham analyst says,

We believe corporate focus on electric vehicle (EV) adoption is starting to accelerate. This bodes well for Valence Technology which has been engaged with multiple manufacturers that have delivered product to high-profile customers. We are raising our near-term estimates to reflect increased industry activity that suggests the company could reach break-even sooner than anticipated.

Capital analyst Jon Hickman tells clients that he's encouraged by Valence's recent order trends and management's comments about its large and growing backlog of orders. He also notes the expansion of Valence's patent portfolio to more than 420 U.S. and international grants and patent applications in fiscal 2010.

In my opinion, Valence has massive growth potential based on exceptional product quality and future electric vehicle demand. I believe investors buying now have limited downside risk with excellent upside reward. Earnings growth in the past year has accelerated compared to earnings growth in the past three years.The company saw a sharp increase in fiscal Q2 revenue which is up 278% YoY. I believe that the share price will easily double in 2011 based on analyst opinions along with future contracts and product demand. I see strong growth in the company's lithium battery production in 2011.

Valence's current stock price is $1.39 and the market cap is $201M with a 144M shares outstanding. Insiders own over 50% along with recent insider buying at $1.20. Billionaire Carl E Berg currently owns 45.4M shares. Carl Berg has an average cost well above $2 a share. It is evident Carl Berg fully believes in the company.

Valence has a breakout alert bullish rating of 81% on my chart program. The 52 week high is $1.55 watch for a potential breakout and a rally to the $1.90 area. Short sellers are holding 14% of the 72M float. In my opinion, shorts would be wise to start covering their position. Option investors are betting Valence share price will be above $2.50 in March of 2011. They also have been buying the June $2.50 call options. Investors could see Valence's stock price rise above $5 again possibly within 12 to 24 months.

Disclosure: I am long VLNC, FCEL.

Additional disclosure: I will be adding to my long position in VLNC.