When I finished my last article about Plug Power (NASDAQ:PLUG), I was wondering when PLUG stock would hit $20. And that was after I said it was ready to plow through $10.
Well, I wrote about Plug Power on July 15. And at the time, it was trading around $9. That said, not only has it moved a buck higher over the past month, but it’s also climbed to nearly $12.80 as of this writing — within $1.55 of its 52-week high. You have to go back to 2008 to find a higher share price.
Overall, Plug Power is riding the wave of alternative energy popularity. But, can it last long enough for PLUG stock to hit $20?
I think it can, but it likely won’t be until some time next year. And here’s why.
The Markets Are Frothy
Forbes senior contributor Rob Isbitts, whose day job is managing money for high net worth investors, recently discussed why the markets appear to be quite frothy and vulnerable to a correction.
That said, Isbitts uses the Dow Jones Industrial Average (DJIA) to explain why he feels this way.
As you’re aware, the DJIA consists of just 30 blue-chip American stocks. In 2020, through Aug. 13, 10 stocks were in positive territory — with Apple (NASDAQ:AAPL), Home Depot (NYSE:HD) and Microsoft (NASDAQ:MSFT) leading the way, all up more than 29%.
Unfortunately, of the 20 stocks that are down for the year, nine of them are down more than 18%.
I’ve always held the belief that if you have a 30-stock portfolio, over the long haul, you want 60% of them to make money.However, more importantly, you want the 18 stocks to deliver an average annualized total return that is double the average of the 10 losers. And overall, meeting this standard ensures market-beating performance.
But, I digress.
Isbitts believes non-tech names are going to start catching up to the performance of tech stocks. Then, reality is going to set in with investors coming to grips with the fact the rally was nothing more than a “fingers crossed, Fed-liquidity-induced rally” — and that’s when the current rally will likely come to an end.
Now, I’m paraphrasing, of course, but you get the drift. The markets are looking good because individual pockets of the economy are delivering gangbuster results leading to supersized returns.
As this relates to PLUG stock, it’s up 309.2% year to date — more than 50 times the return of the S&P 500.
From a valuation perspective, Plug Power currently is trading at almost 15 times sales, about five times its five-year average. I’m as bullish on Plug Power’s prospects as the next person, but that’s a screaming signal PLUG stock has gotten ahead of itself.
Sometimes, I like to say that quality companies grow into their valuations. And despite Plug Power doing a lot right in its goal to hit $1 billion in sales by 2024, it hasn’t quite gotten to the point where valuation permanently detaches from reality. Meanwhile, that is probably the case for Tesla (NASDAQ:TSLA), another innovator I’m bullish about.
Therefore, if the markets correct over the final four-and-a-half months, you can almost be guaranteed; PLUG stock will fall back below $10. And if you genuinely believe in the long-term prospects of the company, like Warren Buffett, you should welcome this opportunity to buy more of its stock at a more reasonable valuation.
If Not 2020, When Will Plug Stock Hit $20?
Not having a crystal ball, I would say some time in the second half of 2021. However, that will likely only happen if its share price remains in double digits. Any protracted retreat between now and the end of the year — based on a market correction along with less-than-stellar quarterly results — would make the wall of worry too difficult to overcome, in my opinion.
Almost unanimously, those of us who’ve written about Plug Power for InvestorPlace in recent months has been optimistic about its prospects. About the only one to strike a defensive tone is Chris Lau, who argued in early August that investors should take profits before the stock falls back to earth:
“Without earnings, investors should still treat the stock as a speculative bet. Plug Power needs to reverse negative operating margins and post positive returns on assets. Until then, the stock will rely on analyst upgrades and deal news to move higher,” Lau wrote.
Additionally, Lau also mentioned that Plug Power has a history of selling its stock to raise capital when shares are popping, and analysts are raising target prices, something that’s currently happening. He even points out that CEO Andrew Marsh sold $11.7 million in shares in early July.
Usually, I’m not bothered by stock sales because people sell shares for all kinds of reasons. In this case, he exercised 1.17 million stock options — most of which had an exercise price of $5.39 and a sale price of $10.01.
Who can blame the guy? Two in hand is worth one in the bush. And besides, the trades were part of a 10b5-1 trading plan established in March. The optics aren’t good, but there’s no smoking gun.
The Bottom Line on PLUG Stock
I agree with my colleague that Plug Power will see lower prices in the future. However, if you don’t need the money in the next 12-24 months, I would hold, putting aside some cash to buy more under $10.
Long-term, I do see Plug Power becoming profitable. Until then, however, shareholders ought to expect some severe volatility.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
