At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Will Clean Energy clean up on Monday?
On Monday, natural-gas promoter Clean Energy Fuels (NAS: CLNE) will announce its "earnings" for fiscal year 2011. Of course, when I say "earnings" I'm using the term loosely. Most analysts actually expect the company to report a $0.17 per-share loss. But that fact isn't keeping the analysts at Northland Securities from upping its price target ahead of the news. This morning, Northland bumped up its target price for the shares nearly 60%, predicting Clean Energy will hit $22 within a year's time.
What's got Northland feeling so bullish about Clean Energy? Nothing much, really. In fact, as far as labels go, Northland actually only expects the stock to perform about as well as the rest of the stock market. But with CE shares up more than 40% over the past 12 months, and already trading well above the analyst's previous prediction of $14 a share, Northland basically faced a conundrum: It could either up its price target now, or be forced to explain why it was still telling investors to hold on to a stock that, by its own estimation, was 50% overpriced going into earnings. That could prove embarrassing if CE fumbles on earnings Monday and the stock takes a hit.
Door No. 3
Of course, there was a third alternative. Rather than sitting on its market perform rating, or upping its target price to track the irrational exuberance of Clean Energy investors, Northland could have called a spade a spade. It could have pointed to CE's stock price and shouted: "Hey! Look how expensive this stock has gotten! Sell it, you Fools!"
Which incidentally, is what I'm going to do right now.
Listen, folks. I know that everyone's going ga-ga for natural gas these days. The commodity is selling for prices so low, they're practically giving it away. That's horrible news for companies like gas specialist Ultra Petroleum (NYS: UPL) , which boasts an industry-low cost of production, yet even so is finding it hard to make a profit selling into a gas glut. It's even worse news for Ultra rivals Chesapeake Energy (NYS: CHK) and Sandridge Energy (NYS: SD) , both of which have higher costs of production than does Ultra, and have consequently had to curtail gas production and shift their focus toward more profitable oil drilling in an effort to stay afloat.
On the other hand, cheap gas is simply wonderful news for companies like Clean Energy, or fellow nat-gas opportunist Westport Innovations (NAS: WPRT) , which know that the cheaper a commodity becomes, the more demand there will be for it. Westport is attacking one end of the demand chain, helping automobile companies develop engines that can run on natural gas instead of gasoline. Meanwhile, Clean Energy is attacking the other side of the market, working like mad to build a chain of refueling depots that can keep Westport-designed engines topped off with clean, efficient, and cheap natural gas. As such, the companies are really two sides of a single coin, both trying to help consumers take advantage of this suddenly cheap and plentiful fuel source.
But here's the problem: It's going to cost a lot of coin to make this nat-gas revolution happen. The costs of funding this revolution have kept Clean Energy from earning a profit since way back in 2005. And until nat-gas becomes a viable automotive fuel, CE will keep burning copious amounts of cash, just as it has in the past: $17 million in negative free cash flow in 2009; $54 million in 2010; $72.5 million over the past 12 months.
See the trend? These numbers are getting steadily bigger, and I fear they haven't yet gotten as big as they'll get. But even if they don't, even if Clean Energy can hold the line on capital spending, at its current rate of cash-burn, it's on target to run out of cash just two years from now. (Viewed another way, with $288 million in debt versus $159 million in cash, CE is already neck-deep in net debt of $129 million.)
Now, maybe Northland is right. Maybe it's safe to go on holding Clean Energy through Monday's earnings news, at least. But before buying any more of the stock, ask yourself: Do you want to gamble that natural gas prices will stay as low as they are now for the next two years? Want to bet the trend doesn't reverse... ever, and that when Clean Energy finally gets done spending all its cash and building all its refueling stations, there will still be a market for its product? If you do, then by all means, invest in Clean Energy today.
If you don't, though, then consider investing in something a little less risky. Oil, maybe. It's selling for $100 a barrel and up, you know. And as it just so happens, the Fool recently published a report on three stocks you might want to own in a world of $100-a-barrel oil. If Clean Energy isn't for you, take a look at this free report -- and decide whether a few bargain stocks in the oil patch might suit you better.
At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 390 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Ultra Petroleum.Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy, Westport Innovations, and Ultra Petroleum.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.