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Wild, pricey fuel-cell stocks need nerves of steel

Fuel-cell technology's ability to provide large amounts of energy in the long term remains a matter of debate. Its ability to power a stock – in either direction – is now unquestioned.

Take Vancouver-based Ballard Power Systems Inc. The shares tripled during 2013. And then things got crazy. The stock doubled again by the end of February. They gained another 125 per cent by March 11, when they hit $9.32 – except they closed the day at $5.65. The shares went up 31 per cent Tuesday – then gave up all the gains Wednesday.

It's not all Ballard's fault, however. Investors have linked the company to its biggest customer, a New York state company called Plug Power Inc. Just under a year ago, Plug Power stock was 15 cents (U.S.); by year-end, $1.55; on March 11, it approached $12, before closing the day just over $6. It, too, had a great Tuesday (when it rose as high as $8.48) and a dismal Wednesday (when it dropped as low as $6.26).

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That kind of volatility threatens to overshadow the promise of fuel-cell technology, which is finally, slowly, being embraced by power companies, makers of buses, and even auto makers. Fuel cells generate power by stripping electrons from hydrogen fuel and create virtually none of the environmental concerns of traditional power systems. Ballard and another Canadian company, Hydrogenics Corp., have great stories to tell about their positions in the alternative-energy economy. Neither is profitable.

The only problem is that investors who want to get on board need an exceptionally strong stomach. If you can even call the current shareholders of these companies "investors."

"This is a wild ride, and it's not meant for investors, because wild rides often end up in a crash," says analyst Dev Bhangui of Byron Capital Markets. "All of the fuel-cell stocks were not trading on fundamentals or technical – they were trading on sentiment, and the sentiment is so amorphous and unpredictable, when it turns, it can turn on a dime, even after 20 years of being sleepy."

Perhaps not quite 20 years. At its peak in 2000, Ballard shares traded for well over $100 (Canadian), and the company had a market capitalization of nearly $20-billion. About 99 per cent of that value was destroyed, though, as the original plan to sell fuel cells to the Big Three U.S. automakers failed when they "dragged their feet for years" on the technology, Mr. Bhangui said.

The company retrenched to providing "fuel stacks" (a collection of fuel cells) to companies that put them into things such as forklifts (Plug Power's main business) or backup-power systems in developing economies. It has gradually moved up the supplier chain to providing higher-margin systems in conjunction with partners like Nokia Corp. It has also become a leader in providing fuel-cell systems for public buses.

The company is now approaching or exceeding the financial milestones that are expected to deliver a bottom-line profit: $20-million (U.S.) in quarterly revenue, along with less than $6.5-million in capital expenditures and gross margins of 28 per cent or more. The company is guiding to sales growth of 30 per cent in 2014. With no earnings of any kind, Ballard has to be valued on revenue, and it trades for just over five times the limited number of analyst forecasts for 2014 sales, according to S&P Capital IQ.

"There are two stages in the life cycle of a company where investors make money," says Mr. Bhangui. "One is an IPO, and the other stage when people make money in a short period of time is when a company goes from negative EPS to earnings-positive, and that is the inflection point [Ballard and Hydrogenics] are approaching."

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Of course, it's not forklifts and buses causing the excitement: Automakers Hyundai and Toyota have embraced the technology, and are claiming they can roll out models with fuel-cell technology by 2015. "It was the strongest endorsement that the day has come for this particular technology to go commercial," Mr. Bhangui says.

For now, though, for Ballard, there are those links to Plug Power, which took one of its recent tumbles when short-sellers at a U.S. firm called Citron Research called it a "casino stock … the lowest form of speculative moonshot" and said its shares were worth 50 cents apiece. Citron objected to how Plug Power continually misses its sales guidance, doesn't actually own the technology it sells, and how management didn't buy any stock when the company raised capital at 15 cents a share last year.

Mr. Bhangui is more polite. "Plug Power has a very, very small niche of forklifts. And just because [the customers] are Wal-Mart, Procter & Gamble, Lowe's, FedEx, people are doing all kinds of projections that go to the moon."

Analyst Robert W. Stone of Cowen & Co. forecast the company would go from $26.6-million in sales in 2013 to $350-million in 2018, and even he had to downgrade Plug Power to "neutral" when it exceeded his $7.50 price target. The company now trades for more than 12 times estimated 2014 revenue.

Mississauga-based Hydrogenics, which counts General Motors among its shareholders, offers a slightly different business mix. Alongside its "power systems" segment, which is similar to Ballard, it has what's called an "OnSite Generation" business. Based in Belgium and with significant European operations, it partners with gas companies and utilities to integrate renewable-energy options with existing power systems.

Perhaps because it's less of a pure play in the fuel-cell frenzy, it offers a lower multiple than the other two. It trades for just over four times estimates of 2014 sales after nearly quadrupling from its 52-week low.

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In the wild, crazy and expensive world of fuel-cell stocks, that qualifies as a bargain.

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