Capstone Turbine: A 'Buy on Dips' Kind of Play

The last time I discussed Captstone Turbine (CPST), the stock had fallen to below a buck, and dropped even lower to near the sixty cent mark soon after. These days, on the other hand, the stock is on the rebound after announcing record quarterly revenue and recieving an upgrade from Ardour Capital, who now ranks the stock as a 'BUY'. (Click here for earnings call transcript.)

I generally don't like following analyst recommendations, mainly because those recommendations usually come way too late; for instance, an analyst upgrade at sixty cents would have done a lot better for your money than the upgrade at a buck fifty. The analysts are sure to tip off their buddies that an up or downgrade is coming before letting the little guy in on the secret, so by the time it gets to you, the big boys are already entrenched in their positions. Nevertheless, an upgrade is an upgrade, and if you're already in when it's announced, then you're likely to benefit.

According to Capstone's earnings released, "Revenue for the third quarter of Fiscal 2011 was $24.2 million, an increase of 51% from the third quarter of Fiscal 2010. Capstone shipped 171 units in the third quarter of Fiscal 2011, compared to 122 units in the same period last year."

Both are significant numbers for a company looking forward towards growth and profitability. The release then goes on to add that, "Capstone's backlog at the end of the third quarter was $84.7 million, up 8% from the same period last year."

That's an indication that Capstone's products are also growing in demand.

Capstone is a leading producer of low-emission, clean technology microturbine systems and has long been one of my 'green' picks. With the constant threat of rising oil prices, there's a fine niche for company's like this one that offer clean technology and / or alternative energy. What's always held this one back was the lack of a move towards profits and free cash flow.

Unfortunately, while news of increased orders and growing revenue shows a solid trend, the losses continue for Capstone, and that will stunt any further significant move higher, in my opinion, analyst upgrade or not.

The net loss for the fiscal 3Q 2011 was $8.1 million, although the loss from operations was $6.5 million, over 30% lower than the operating loss for the same period last year.

All numbers were taken from Capstone's recent earnings release.

Great strides are being made for this company in terms of growth and potential, and if the current trends continue, Capstone will eventually arrive to the targets of operating profit and free cash flow.

For the time being, I still like this one as an 'accumulate for the long term', although while the analyst is saying that now is the time to buy, I'm more apt to say that now is the time to hold. I think the time to buy CPST is when the stock is trading at least south of the $1.20 mark; and the stock spent enough time below that mark during the past year to justify calling it a 'HOLD' now.

Capstone is a sure 'Buy the dips' kind of play, but right now the stock is in a spike. If it goes much higher, then maybe even bank some profits and take a 'green' vacation (Caribbean) with the money made from an investment in this 'green' stock.

Disclosure: Long CPST.