Ballard Power Systems (BLDP), a major supplier of Plug Power, also soared in sympathy. What was the catalyst for the incredible investor enthusiasm? Plug Power's CEO, Andy Marsh, told MarketWatch that he will announce the signing of an additional order in North America with a global automaker in two to three weeks.
That's it, no names, no numbers, no kiss and tell, and if you're scratching your head wondering why the shares would move 15% higher, much less a 57% jump, you haven't been paying attention. Plug Power is trading on extreme emotion and leaving an enormous wake of scorched portfolios in the process.
You will want to review my short sale trade idea using options or stock on Real Money Pro to take advantage of the current short squeeze.
After 25 years of studying markets, I don't recall the last time an announcement of an announcement had a similar impact other than pharmaceutical stocks. The fundamental numbers don't support and won't sustain a price level above $7, but it doesn't matter. Plug Power entered a perfect storm for a short squeeze as I will explain.
Shares rose from $4 to almost $12 within the span of a couple of weeks, creating an epic short squeeze. It's easy to see why after short interest went from about 3 million shares to more than 22 million shares in six months. The shares traded recently at $6.78, down $1.70, or 20%.
On March 11, when the stock was trading at a 52-week high, Citron Research issued a blistering indictment against the bull thesis that came just short of declaring the Marsh, the CEO, a manipulator.
Citron Research's 50 cent valuation opinion sent shares spiraling lower and likely increased short sales. That in turn set up round two of the short squeezes. After Marsh stated the company will announce details of an additional automaker order, short-sellers rushed for the exits, spiking shares.
I understand why Marsh was motivated to halt the falling share price and to burn short-sellers (and maybe Citron Research), but for long-term investors and potential investors, the extreme price volatility is a serious turnoff. Conservative buy-and-hold investors aren't attracted to one-day pop and drops, and building a strong base of investors is one of the keys to sustainable price growth.
While I don't share Citron Research's price target of 50 cents a share, $8 and especially $9-plus appears to me as even more ridiculous. Yes, I get sales are improving, and I truly want the company to succeed, and I like the technology, but the forward estimated earnings don't support the current price. Part of the hidden problem is the price isn't even the price for long.
According to WSJ.com, the float is 110.55 million out of 117.03 shares outstanding. At $7, a 1% ownership will cost $7.7 million. You won't own 1% for long though because the company has issued millions of stock warrants as an enticement for the many equity raises over the years.
In a little more than a month, almost 11 million convertible Series C preferred stock becomes convertible. When converted, it will dilute every shareholder by 9.4%, and you can bet the shares will become converted. Air Liquide Investissements paid $2.59 million for an investment worth over $80 million.
If that were the only expected dilution shareholders face, it may be palatable, albeit that's only the next significant date for what is likely to be a rapidly expanding number of shares available in the float.
The big question for investors to ask is what's the potential payoff if the company breaks free and becomes profitable? Next year's estimated earnings are 5 cents a share. If we adjust for likely dilution, it becomes closer to 3 cents.
If the stock were at $3, the forward earnings multiple would about 100; at $6, the multiple would be 200. That compares to Tesla Motors (TSLA) at 56, Amazon (AMZN) at 83, Google (GOOG) at 19 and Apple (AAPL) at 11. Historically, stocks with multiples over 20 underperform those whose multiples are less than 20. If you're buying Plug Power above $8, you're paying over 200.
That means it will take 200 years of earnings to pay for one share if the company is able to reach estimates for 2015 while not needing to raise more capital.
The company is burning through cash at a rate that one would expect at least one more capital increase (i.e. further dilution) if the company stays on track and doesn't hit a pothole on the way to becoming profitable.
If you're an active day trader, Plug Power is a superb trading vehicle with loads of volatility; however, if you're an investor, ring the register and take some profit because you will have another chance to buy much lower.
At the time of publication, Weinstein is short Plug Power.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.