Westport Innovations: This Is Where It Gets Interesting

Westport Innovations is a classic case of a company that has no fundamentally based trade: It has yet to earn a profit and most of the upside in the stock has been predicated on the long-term narrative about natural gas trucking as the spread between diesel -- the conventional trucking fuel -- and natural gas has continued to widen.

If technical trading indicators are the best short-term read for a stock that lacks a fundamental near-term earnings case, than breaking below the 200-day and then finding no support is a bad sign. If it's a risk-off equities environment broadly speaking, there may be no floor for a stock that is driven by sentiment plus a long-term thesis, especially as shorts target it. It's broken through that 200-day for the first time since January 2011, too, a dubious distinction.

The move up to $50 on March 21 may have attracted the shorts' immediate attention, but it looks like they have taken a deeper dive into Westport and may be hanging around. From the middle to the end of March -- notably including the March 21 share price high -- short interest in Westport increased by 3.5%, the most among all alternative energy stocks, according to Stifel, up to 21.8% of the company's share float. In the most recent two week period (though April 13) short interest spiked by 7.8%, again the highest short interest in any clean energy stock, and taking the short exposure to over 31% of the Westport float.

As I said, it's tough to recommend a clean energy stock that has traded up historically based on sentiment and as part of a long-term thesis just because its former trading pattern suggests that there is support when the earnings case may not be sustainable -- just look at solar. In the case of Westport, it's not even like solar where earnings weren't sustainable because government subsidy programs were on the wane: Westport has no earnings. That said, Westport does have potential positive catalysts coming up that could offset the fear of the Cummins relationship change foretelling a profitless future for this company.

The top headline is likely to be a relationship with a North American truck engine maker. Westport has said it will have a "mystery OEM" to name, and analysts are betting that it is Detroit Diesel or another major North American diesel engine player. Westport has a relationship with Caterpillar that it signed last year and while David Demers, CEO at Westport, told TheStreet at that time it was probably further out on the horizon for actual sales, several analysts suspect that there may be an acceleration in this relationship.

Westport also has its relationships with Volvo in Europe and Weichei in China and as several analysts suggested to me, by the time Cummins is selling its own 15-liter engine, Cummins could be smaller than Weichei in the Westport equation, and the Westport Cummins joint venture is still selling 9-liter and 12-liter engines.

Matthew Blair, a Macquarie analyst who recently initiated on Westport, said in his report that the Cummins relationship is responsible for one-third of Westport's value. With his price target on Westport at $51, that would imply that even if the Cummins relationship ended, Westport shares would be worth more than the $29 they were trading at on Tuesday, actually $34.

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