I'm going to attempt something a little odd today, Fools. Even though Westport Innovations which designs engines that can run on natural gas -- makes up 2.6% of my real-life holdings, I'm going to give you three reasons to consider selling the stock today.
Why am I doing this?
Recently, Nobel Prize winner Daniel Kahneman visited Fool headquarters in Virginia. While visiting, he talked about how a number of different biases can lead us to believe we can predict the future with relative certainty. In reality, he argued, we are just deluding ourselves.
It got me thinking about how I don't write enough about the risks of owning the stocks I own. So, though I don't plan on selling my Westport shares anytime soon, I think it's healthy for me to practice and model this behavior.
1. No manufacturing capability
One key distinction Westport investors need to understand is that the company is in the business of designing natural gas engines. It is not, however, in the business of actually manufacturing these engines. That's why the company has spent so much time building out partnerships with other manufacturers.
No partnership is more important to Westport than its Cummins-Westport (CWI) joint venture with engine-maker Cummins . Last year, CWI provided $198 million in revenue for Westport -- or 32% of Westport's total revenue. However, in early 2012, Cummins announced that it would be attempting to develop its own natural gas engine without Westport.
Source: CWI, ISX12 G engine shown
Though the type of engine Cummins is aiming for is fundamentally different than what CWI offers the market, it highlights a crucial risk: If manufacturers are able to develop their own natural gas engine technologies, Westport's intellectual property and patents are completely useless.
2. Banking on unreliable commodity prices
The abundance and low price of natural gas is the key premise of an investment in Westport. The average cost for a gallon of diesel currently sits at $3.88, while a gallon of gas equivalent of natural gas will run you $2.10. Westport is able to convince industries to transition their fleets to natural gas based on this 46% discount.
But who is to say that this will always be the case? Last year, there was a serious supply glut of natural gas, and many energy companies were forced to cut back on their natural gas production because of record-low prices. Over time, the pendulum could swing in the other direction. Natural gas prices could rise so that the cost savings associated with natural gas vehicles is no longer attractive to Westport customers.
And this doesn't even take into account the chance that fracking techniques -- which have made vast reserves of natural gas available for the first time -- won't be changed, or outlawed altogether. Although the jury is still out on how safe fracking is, there is growing pressure on lawmakers to clamp down on the industry.
3. Relying on others to build out the infrastructure
Let's assume that Westport is able to defend its intellectual property, and that energy prices continue to be favorable for Westport. If you're a long-haul trucker who is considering buying a natural gas engine, the potential savings that natural gas offers are completely meaningless if there aren't enough stations at which to fill up your tank.
That's one reason why, in March, Westport announced a partnership with Clean Energy Fuels . Clean Energy's goal is to build out the infrastructure necessary to meet the refueling needs of America's natural gas fleets. Essentially, the two companies are bundling CWI's tank systems with a favorable long-term fuel contract for those who buy the engines.
Source: Clean Energy Fuels
While both companies are smart to make the move, the fact that they need it at all should give investors pause. If the trend toward natural gas were a shoo-in, companies would be tripping over themselves fighting to sign up for natural gas engines. As of now, that's not the case
To be honest, I think I've been too bullish when writing article about Westport in the past. The company certainly does have possibilities -- and I think my 2.6% allocation is appropriate -- but I need to do a better job in the future of keeping these serious risks in mind.
To further help you determine whether Westport Innovations is right for your portfolio, The Motley Fool has just released a brand-new premium report breaking down the company's opportunities, competitive advantages, and risks. To get started, simply click here now for instant access.
The article 3 Reasons to Sell Westport Innovations originally appeared on Fool.com.
Fool contributor Brian Stoffel owns shares of Cummins and Westport Innovations. The Motley Fool recommends Clean Energy Fuels, Cummins, and Westport Innovations. The Motley Fool owns shares of Cummins and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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