Buy, Sell, or Hold: Capstone Turbine

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons and decide whether its possible upside outweighs its risks. Let's take a look at Capstone Turbine (NAS: CPST) today and see why you might want to buy, sell, or hold it.

With a market capitalization near $320 million, Capstone Turbine is a rather small company. It makes and sells low-emission microturbines (and related products and services) used to generate power.

Buy
A key reason to consider buying the company is that its revenue has been growing briskly, averaging annual growth of more than 30% over the past five years (though that rate has, admittedly, been slowing).

Capstone's future seems promising, too. In our CAPS community, highly rated investor saunafool notes "several catalysts which could make the microturbines leave the niche market and enter more mainstream markets." These potential growth channels include on-site energy production at proliferating shale-gas production sites, commercially viable microturbine trucks, and power delivery for hotels via Capstone technology that converts waste heat into hot water.

As my colleague Dan Caplinger has noted: "The company is targeting the Eagle Ford shale play, where Chesapeake Energy (NYS: CHK) and EOG Resources (NYS: EOG) have extensive assets. Capstone has already announced orders for a total of 64 microturbines in the Eagle Ford since August 2010." Capstone is in a position to help oil and gas companies in these areas by providing power for drilling and other needs.

Capstone could also be acquired by a bigger company, such as General Electric (NYS: GE) or Caterpillar (NYS: CAT) , that is expanding its presence in the alternative-energy arena. This isn't the best reason to buy, though, as it may never happen. And if it does, while it will likely deliver a pop in share price, shareholders will no longer be able to look forward to participating in the long-term growth of a small company.

Right now, though, Capstone is continuing to sell its microturbines, including 17 to LUKOIL in Russia -- where there are many remote locations that could use its technology -- a dozen to a California-based energy company, and more.

Sell
A big red flag for Capstone is its stock price: At little more than a dollar per share, it's a penny stock, and pennies are notorious for their volatility and likelihood of being manipulated by pump-and-dump hypesters. Sure, some end up big winners, but a vast number simply wipe out a lot of shareholder wealth.

Dilution is another concern. Back in 2008, the company had about 145 million shares outstanding. Recently, it had 267 million. By increasing its number of shares, the company is reducing the value of existing shareholders' stakes.

Another reason to consider selling the stock is this: although its revenue has been growing rapidly, it has been posting net losses for many years, not net gains. (Capstone is free-cash-flow-negative, as well.) Many companies do take a while to become profitable, and analysts do expect it to move into the black within a few years. Still, all other things being equal, a profitable company is more attractive than an unprofitable one, and there are plenty of lovely money-makers around.

Then there's Capstone's short interest, which has been rising in recent months and as of mid-June was at 22.8% of the float being shorted. Those shorting the company may be worrying, among other things, about a slowdown in natural-gas drilling due to ample supply and low prices.

Hold
Given the reasons to buy or sell Capstone, it's not unreasonable to decide just to hold off. You might wait for actual profits to materialize, or for the share count to stop rising so significantly, or for the stock price to move out of penny-stock territory and top $5 per share.

The verdict
I'll be holding off on Capstone, at least for now. It may well perform spectacularly in the coming years, but there are plenty of compelling stocks out there with more certain futures. Still, everyone's investment calculations are different; do your own digging and see what you think.

If you're looking for a powerful player in the energy and/or power fields, consider General Electric. It has a lot going for it, and our brand-new premium General Electric research service will tell you more about its future growth catalysts, as well as potential risks on the horizon.

The article Buy, Sell, or Hold: Capstone Turbine originally appeared on Fool.com.

LongtimeFool contributorSelena Maranjian,whom you canfollow on Twitter,holds no position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Chesapeake Energy.Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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