Hoku Scientific: Wait For a Better Entry Point

Hoku Scientific Inc. (HOKU) has been a great trading stock. What's not to like about it? It's liquid, volatile, has the momentum on its side and has some legit news to back it all up.

Two major contracts in the past couple of weeks have generated a lot of interest in this small cap name. Hoku recently signed a ten-year polysilicon contract with Suntech Power Holdings Co. (STP), Ltd. that may provide for up to $678 million in payments and which was followed by a contract with Solar-Fabrik with the potential for approximately $185 million payable to Hoku over a seven-year period. The company is subject to the achievement of certain polysilicon production and quality milestones, the acceptance of product deliveries and other conditions.

But is there really a reason to join in on the rush and frenzy surrounding Hoku now or is it better off waiting for the stampede to end?

The stock has soared on news of Hoku hooking up with some larger solar players, but besides the contracts being substantial in size, the costs of production are also rather significant, something that hasn't been mentioned by the mainstream. It's worth stressing that Hoku's polysilicon plant is still in the process of being constructed in Idaho. The estimated cost of establishing a 2,000 metric ton per year polysilicon plant may require total construction costs of approximately $260 million and with the company expecting to increase the size of the plant by up to 1,000 additional metric tons, construction costs will be even higher.

Therefore, the fact that production isn't happening just yet will inevitably catch up with the market. The potential issuance of equity securities to finance construction could also weigh on Hoku shares and is another reason to be cautious in the short term. That's not a knock on the long term prospects that look bright if the company can execute, but perhaps a better entry awaits at lower levels in the short term.

HOKU 1-yr chart:

Comments

[suzy obrien]

" ... in the process of being constructed ..." - have they put a shovel into the dirt besides the one they used at the groundbreaking ceremony?