Raser Technologies: A Short Squeeze in the Making

Jun.16.08 | About: Raser Technologies, (RZTIQ)

I have been following Raser Technologies (RZ) for several years now, and as a money manager, I don't see too many opportunities from the long side which are as compelling as this one - particularly in this recessionary environment. Given the disclosures available in the company's public filings, I think this ~$9 stock will be worth at least $25 by year-end, and with a short interest of 35 days of volume, this is a tinder box awaiting a match.

Why does a skeptic like me like a stock like this?

First, the company is in the alternative energy space. Specifically, they are in the development stage of creating geothermal energy plants. These are power plants which harness warm/hot water from beneath the earth's crust to create steam, which then turns a turbine and thus produces electricity. Their first plants should be online and producing electricity in the 4th quarter (this is why I like the stock NOW vs. waiting until Q4 when it will likely be too late). While I like the alternative energy space, I REALLY like geothermal - it's what's called a "baseload replacement" technology - something which can take the place of coal, and something which, because of the renewable portfolio standards, the utilities HAVE to purchase.

Second, skeptics are everywhere, but their story is old and clearly shows a lack of solid research. The short interest is over 7 million shares and the volume has recently been below 200,000 shares per day. In my opinion, there is a big squeeze brewing. See, Raser is a "management redo." That is, the old management pursued a business strategy developing a technology which met with no success. For good reason, investors were skeptical. Here's the problem: the new management team has extensive credentials, is pursuing a very strong business plan (which does, by the way, still use some of the old technology - but in a much less substantial way), and has assembled all the right partners. In this author's opinion, the shorts are hanging around for legacy reasons.

Even the 10Q Detective, whom this author admires, is focused on history. Skeptics will point to how the company doesn't make money and how it has promised things in the past and not delivered (they even resort to highlighting the company's 10Q risk disclosures - something which is awfullly stale). This misses the point - stock prices are about the FUTURE - they are an estimation of the market's view of the present value of the FUTURE cash flow streams. Looking at the the past is only part of the story....for Raser as well as with other equities, investors must look forward, and in this case, the future is very bright.

Third, the company just hosted a well-attended analyst day. This is still a relatively underfollowed company (by institutional standards), yet I suspect there was some real interest generated....perhaps some more investment banks will initiate coverage shortly. More to the point however, the company paraded out their key partners - one of which is United Technologies, a $67 billion company, known for its industrial assets. United Technologies (UTX), whose PureCycle geothermal machine just won an award from the National Energy Resources Organization [NERO], called Raser their "key partner" in developing geothermal resources. Talk about an endorsement: the UTX people have not only been at their analyst meeting, but also participated in a recent ground-breaking ceremony with Senator Orin Hatch to begin construction of Raser's first power plant.

Fourth, this "development stage" company which currently has no revenue and has a history of producing losses, should be producing revenue from multiple power plants in the fourth quarter of 2008. Specifically, the company has signed power-purchase agreements for 30+ megawatts of electricity and claims to have 80-85mhw of projects in development now. At least two of their plants (and perhaps more) should be producing revenue by Q4. That should change the shape of this company substantially, as it becomes something more conservative (vs. speculator) investors will accept (not to mention the quants, who will jump all over this because of the change from no revenue to revenue-producing). In terms of numbers, according to the company's filings, each 10 mhw of power amounts to roughly $25 million of EBITDA (when measured in net present value dollars with a 15% discount rate). Even if investors wish to remain skeptical about the company's ability to roll-out plants as quickly as the company claims (100 mhw per year in the first 3 years and 150 mhw per year each year thereafter), this stock is an easy double once they put the first plant online (Q4).

In my opinion, the shorts, who got this right many moons ago, have overstayed their welcome and are due for a massive squeeze in the very near future. They've tried and tried again to push this lower (astute investors would be well-served to look at the closing prints each day - there is so clearly some "funny business" going on here worthy of inspection by regulators), yet have been reasonably unsuccessful. The steady drumbeat of interim developments continues and I suspect more material announcements are imminent - culminating with revenue in Q4.

Good luck!

Disclosure: Author holds a long position in RZ