Small Cap Stocks

ENER’s news today regarding production cutbacks following an “abrupt shift in the French and Italian solar incentive structures” calls into serious doubt the company’s ability to continue the recent financial turnaround. And the Market is reacting accordingly. I still believe the company can, in theory, still restructure the convertible debt, but with the lower stock price and tepid end markets, the dilution equation would now be quite onerous for equity shareholders. Obviously my previous post about ENER’s worst case dilution is flat out wrong. This is obviously not a stock I would average down on, as despite the lower stock price, the risks are quite large here.

Well, I needed a nice tax loss and it’s always good to be reminded why diversification is so important when investing in high-risk equities. It’s rare that things work out as planned either on the downside or the upside.

ENER (recent price: $4.30) remains, in my opinion, an interesting investment situation, even if I’ve been losing on this one to date. The company’s financial results are clearly improving and the company bonds have been on a tear. The stock, however, is still stuck at the low 4′s, despite occasional rallies and then declines. The main reason (if there is really any rationality for stock prices), I believe, for the poor performance is the prospect of stock dilution to pay off the convertible debt in 2013. The company has already done several debt-for-equity swaps, and clearly this is a restructuring strategy they may continue to pursue.

But, are debt-for-equity swaps something to be scared of? Not really. It all depends…on the stock price, and on your bankers/lenders, who ultimately control the prices via their support or lack thereof. In the case, of ENER, my best guess is that in a worst case, assuming their bankers don’t try to screw the company (which I doubt, since the company has potential), the company could issue 50 million shares (round numbers here for simplicity) at around $4 a share to pay off all the debt. That leaves the company with 100 million shares, nearly double the current share count. Massive dilution you say? But wait, the debt will now be at ZERO. And the company will have well over $100 million in cash to fund operations instead of paying down debt. All in all, even with 100 million shares, the enterprise value would be only $300 million. The company is expecting over $300 million in sales in 2011, and has strong growth prospects in the years ahead. So is $300 million enterprise value with zero debt and strong growth prospects, all that bad? I say, it’s a good and smart deal.

The positive counterpart to the above scenario is that it’s entirely feasible that the stock price will go up as more investors become aware, or at least trust, in the financial turnaround. In that case, any debt-for-equity swaps would be done a much higher price than $4, implying a much lower share issuance count, which would of course be quite bullish.

All in all, I’m still hopeful for ENER, since I’ve seen these near death spirals before (e.g. VG) and the odds of pulling out of them are very strong, if financial results show continued improvement, if you have some lenders on your side (always the case in these situations, since lenders have an opportunity for hefty fees in these situations) and if the Market is somewhat decent. The next few quarters will be crucial to the ENER story.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in ENER. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Since I’m still long a bit of ENER (and losing money), I decided to finally check the financial numbers again given the current stock price. So I quickly pulled up the last quarters’ financial release and saw this:

“Total revenues for the third quarter of fiscal 2010 were $72 million, an increase of nearly ten percent from $66 million in the third quarter of fiscal 2009, and 36 percent from $53 million in the second quarter of fiscal 2010.

Net loss for the third quarter of fiscal 2010, was $385 million, or $9.10 per diluted share. Excluding the impairment charge, the quarter’s net loss was $27 million, or $0.64 per diluted share. The company reported net income of $1 million, or $0.03 per diluted share, in the third quarter of fiscal 2009 and a net loss of $39 million, or $0.92 per diluted share, in the second quarter of fiscal 2010.”

Well, after seeing this again, I feel a bit more comfortable in my position in ENER junk. You have to love a $385 million loss, or $9.10 per share! Seems like exactly the type of massive loss that signals a bottom in the abysmal financial performance. And sales are beginning to increase? I’m hopeful that things can only improve from here. I guess their next step is to somehow refinance all their convertible debt issued during the last solar boom.

In any case, the next quarters numbers should surely prove interesting and provide evidence of continued improvement or descent into oblivion.

Not that history repeats, but I encourage readers to check out PWER’s quarterly report last year when the stock was less than $1 (thru June 2009, the company had lost over $60 million and looked headed for bankruptcy). A year later, it’s up over 1,000%, profits are soaring, and everyone loves the company.

Lesson: Things change (or so I hope).

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in ENER. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

And now for another renewable energy/green pick (our last two, RSOL and CECE have been doing well):
Energy Conversion Devices (ENER – current price – $7.25).

Description of company:

“We design, manufacture and sell photovoltaic (“PV”) products, known as PV or solar laminates that generate clean, renewable energy by converting sunlight into electricity. Our solar laminates have unique characteristics that differentiate them from conventional crystalline solar modules, including physical flexibility, light weight, high durability and ease of installation. These characteristics make our products particularly suitable for rooftop and building integrated photovoltaic (“BIPV”) applications, which are our target markets.”

Like many of my investment ideas, I am attracted to ENER simply because it is trading at a five-year low, and is reporting massive losses. However, despite these apparent negatives the company is positioned to take advantage of the extraordinary growth in renewable energy sector over the coming years. Of note, is that the company seems to have invested over $550 million over the past few years building out significant solar PV manufacturing facilities. This is set against an enterprise value of a little over $400 million, implying that the company’s stock price is selling beneath replacement cost. The counterargument to this is, of course, that the company overinvested in manufacturing capacity. However, I tend to believe that any excess capacity in the solar sector will be reduced with time. So it’s more of a timing issue than a complete loss scenario. Finally, I should mention that ENER is often rumored as an acquisition candidate for a larger solar company.

As always, I have no idea where ENER will trade in the near-term, but buying at a five-year low when prospects for the company appear dismal, despite the tremendous potential future growth opportunities, is probably as good a time as any to take a chance. I suspect that as ENER’s losses lessen over the coming quarters, and new deals are announced, the stock price will recover.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in ENER. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise