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(PLUG): A Prospect On Borrowed Time

|About: Plug Power, Inc. (PLUG), Includes: BLDP


PLUG in an unprofitable company on borrowed time.

Recent price action represents a bearish trend.

Citron report and stock offering provided the negative catalyst for this downtrend.

The stock has broken through multiple resistance levels rather quickly in this recent downtrend.

What is Plug Power?

Plug Power (NASDAQ:PLUG) provides fuel cell powered electric lift trucks, basically a cheaper alternative to the lead acid battery models. What is fuel cell technology? Basically, it is converting chemical energy to electricity from the oxidation of organic compounds or more frequently hydrogen. The appeal comes from rising oil prices, calls for a reduction in each entity's carbon footprint. It is important to note that PLUG doesn't actually make the fuel cells, they get those from Ballard Power (NASDAQ:BLDP).

Why do they Matter?

Well because the volume seems to think so quite frankly. This stock gives amazing volume each day and would be one of my favorite traders if shares were not so hard to find. The volume comes from traders gathering at what they see as a liquid stock. The problem is the huge concentration of traders help to push the prices up to irrational levels, which in turn attracts investors. Investors are drawn by the price increases we have seen this year and the fact that Plug Power does work in alternative energy which is a focus of leading governments recently in light of oil's depressing pricing due to its apparent scarcity. What's more is the hydrogen fuel cell could actually do wonders in lowering our carbon footprint. In my opinion things are unsustainable as they stand, even after the fall from grace.

Main Occurrences:

•PLUG has a 52 week high of 11.72 from a low of 0.15, which represents a 7700+ move up.

•The share price is now falling rapidly breaking numerous support levels without much letup.

•The company has 12 years of losses.

•Recently had a stock offering.

•Challenged by Citron Research.

Explanation of the Recent Price action:

Alternative energy plays have been pretty hot lately and PLUG has benefited greatly from that. Traders and investors alike seem to be tripping over each other to find the next hot energy play and for the past few months, that play was PLUG. It is hard to justify a 7000% move for any company based on prospects, let alone a company that hasn't had profits in 12 years. To be fair, PLUG is not a horrible company and there technology works, you can understand why people were excited but the severity of the move was illogical. One thing about the stock market is people start to reevaluate the logic in a trade once they begin to see the stock go red, which is what is happening with PLUG right now. Once a stock has a dip an investor needs to know that multiples and intrinsic value are in his/her favor to stay long. This value isn't here just yet with PLUG and FCEL. Between Citron Research's negative outlook and the stock offering, investors and traders have had the negative catalysts needed to cast doubt over the industry in the short to medium term. While PLUG has shown it can run well if good news comes, I'm afraid there just simply isn't enough value to warrant me being bullish on this company in this downtrend. While there is the considerable risk of a squeeze up here, I find myself firmly on the short side.

How I would play PLUG In the short term?

Though the stock is close to support at the 3.78-3.87 area, the chart is overwhelmingly bearish with the next key level being the 3.5 area if 3.8 falls. It is however important to note that the price action can change very quickly on this one in the presence of positive news. Also there has been evidence of short squeezes in the past, which is the biggest risk on this kind of volume. Shares are difficult to find but I would not try to fight the trend here, it could be very costly. I would wait to see if it breaks support and then quickly look for an entry on the short side if the price action agrees with me, it probably won't crash all at once but the chart does imply a bearish trend. Above all, trade responsibly here as news or a bounce could have any number of effects on this stock with this huge volume. With all of this in mind the shorts will be quick here when the stock starts to reverse. If it really begins to tank, which is a big possibility here, it would be good to get out in the low 3's. Try to avoid risking a bounce off support. With so many levels and such good volume a bounce off one level could trigger a nasty squeeze.

Long Term:

I think there is more to come from PLUG. Their business model is simple but there have been numerous letdowns on management's targets. Price targets of $14 have been thrown about. While farfetched currently, if this company is handled well, and gets earnings the target is possible, but i believe $8 is a more reasonable target. The main issue right now is that there is an operating loss with cost of revenue sitting at 142% of revenue, which will weigh heavily in any responsible investor's mind particularly when he/she considers that the earlier income statements offer similar trends. PLUG must now either cut operating cost significantly or improve their revenues significantly. I think the latter is possible if the product is pushed correctly, but the guidance letdowns cannot continue. PLUG is not aiming for a big market and can establish itself as a niche player if rising fuel costs in continue to provide a need for cheaper alternatives. I would like to see more diversity in operations, with lift trucks being a relatively small market. But this is where it becomes challenging for Plug. The suggestion that the Chinese can come up with cheaper alternatives is not invalid. In fact it is a big factor in Plug's long term success. Can a company with no earnings in 12 years cope with competition from larger cash rich companies if the market becomes profitable? Are fuel cell prices immune from the laws of supply and demand that drove oil prices upwards? How big can the market get? There are many questions that need to be answered, which is normal for a prospect. Prospects don't normally have profits or a huge market with lots of sales, but with no profits for 12 years you have to wonder, at what point does a prospect have to actually begin to make money. In my opinion that point passed long ago for PLUG, but you have to respect a stock that surges like this on positive news. I think Plug Power will have more good news and the stock will be a good long again one day, but fighting the trend right now would be ill-advised.

What would I look for as an investor?

  1. Earnings: This company needs to start making money. Plug is in a hot sector and the main gripe every analyst has had with it has been the prolonged operating losses. To become profitable after such a long time would go a long way in shutting the mouths of many potential shorts, while simultaneously encouraging investment in what is admittedly an exciting company. There has been talk of Plug becoming profitable this year, this would be a key step in the evolution of Plug from a nice trading stock to a potential investment.
  2. A good entry: While the trend is rather intimidating, there is more significant resistance around the 2.5 area, do your own research but in my opinion this could be a good place for investors to enter.
  3. More good News: this stock can run on news, bottom line. We may be taken on a ride if we get more positive news from this company. Remember this is a heavily traded stock in a hot industry.

In closing, Plug Power is a lovely stock to trade. As an investment the price action could do more to inspire the confidence of investors. There are likely to be cheaper prices ahead, but remember even a company with bad earnings can become a good investment if the price is right.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.