Long Shot: Notes from So. Calif. Stock Conference

 | Aug 31, 2012 | 10:26 AM EDT
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Real Money's Long Shot column is dedicated to trading ideas that are highly risky, but which present an opportunity for significant payoff if they work. Such ideas are sometimes characterized as "lottery tickets" and are for only the most risk-tolerant investors, as the potential for 100% loss is high.

Every August, I traipse down the road to a great small-cap conference held in sunny Newport Beach: the Southern California Stock Conference. This one-day small cap/micro cap confab provides a wonderful opportunity to browse for new ideas. The names are high quality, undercovered and many will become the hot growth stories of tomorrow.

One idea that intrigued me is Quantum Fuel Systems (QTWW), which provides technology related to alternatively-fueled vehicles. The name fits one of my macro themes for the decade, that of finding beneficiaries of sustainably low natural gas prices. The majority of Quantum's revenue come from the CNG (compressed natural gas) storage tanks. This may initially sound like a commodity, but for vehicles it is important to be small and light, while still carrying enough CNG for reasonable drive distance. Quantum makes tanks using advanced carbon composite materials, which gives them a great technology advantage. Volumes for natural gas-powered vehicles are going through the roof, and Quantum is quadrupling production capacity to meet demand in 2013.

Beyond CNG, they also make propulsion systems for hybrid and electric vehicles. They have a design win at Fisker, which may or may not work out, but are also designed into the Ford F-150 hybrid truck, which could be a winner over time. They are also working on fuel systems for hydrogen-powered fuel cell vehicles. That work is development stage, but is a natural outgrowth of the CNG systems. Fuel cell vehicles have struggled to overcome many technical challenges, but again this effort is pure optionality.

The company has been less-than-focused over the years, getting into wind farm and solar development. A new management team realizes the need to be focused on an extraordinary opportunity in natural gas and is likely to shed those peripheral efforts.

Analysts are looking for a near doubling of revenue in 2012, and another 50% growth in 2013. The company has lost money as it invests in growth, but a cost-cutting program that will reduce operating expenses by over $4 million a year should help them achieve profitability in 2013. With an enterprise value of only $25 million vs. expectations of more than $60 million in sales in 2013, the valuation looks at least reasonable, although they will have to prove the earnings power in the out years. The Street is starting to notice the name.  Roth and Merriman -- small cap and clean tech specialists -- recently initiated coverage. 

At $31 million cap (enterprise value nets out debt and cash impacts) and losing money now, the stock holds meaningful risk, but is promising nonetheless.  There are very few ways to play the natgas beneficiary theme, and here is one idea whose business is booming in a stagnant economy. Micro-cap investors should start doing their homework on Quantum.

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