Many “story stocks” have won big in the months following March’s novel coronavirus crash. But few have performed as well as hydrogen stocks. With many major names in the space generating triple-digit gains, those who dived into this megatrend have realized big profits, or are sitting on massive gains.
Yet, while this sector has been one of the few that’s performed during the pandemic, it may be time to head for the exits. How so? Firstly, major stocks in this sector trade at generous growth premiums. Granted, this sector is set to grow tremendously in the coming decades. But, this may be more than priced into shares.
While valuation hasn’t been a chief concern these past few months, investors may start getting concerned names in the space have rallied too far, too fast. With this in mind, valuation contraction could be on the horizon. Even if the major hydrogen names continue to crush growth expectations.
Secondly, many of the companies in this space aren’t exactly ready for prime time. Investors have ignored the red flags this year. But, these issues bubbling under the surface could finally have an impact, fueling a sell-off in the sector.
So, what’s the call here? If you bought in at lower prices, it may be time to cash out of these three hydrogen stocks:
Hydrogen Stocks to Sell: Bloom Energy (BE)
Bloom Energy may be up more than five-fold since March. But, as shares trade near their 52-week highs, even some of the company’s largest shareholders are looking to hit the “sell” button.
On Oct 2, Morgan Stanley offered a large block (9.2 million shares) of BE stock on the open market. The seller of the stake wasn’t disclosed. But two institutional shareholders are rumored to be the ones looking to cash out.
Does that mean you should follow suit? Possibly. Granted, the story behind this growth stock remains solid. As InvestorPlace’s Chris Markoch detailed last month, Bloom is “betting boldly” on wide scale industrial use of hydrogen fuel cells. In other words, this company, which is today mainly focused on the on-site power generation end of the business, could see tremendous growth, as industrial end-users pivot from fossil fuels to this more eco-friendly alternative.
Yet, while not as pricey as rivals such as Plug Power and FuelCell Energy (NASDAQ:FCEL), the recent run-up still means shares trade at a frothy valuation. Even when accounting for the company’s projected revenue growth between this year and the next.
With this in mind, it makes sense a large institutional block recently came to market. With some of the smart money heading for the exits, it may be wise to follow their lead.
Nikola (NKLA)
Unlike Bloom or Plug Power (more below), Nikola is more a hydrogen-adjacent play rather than a pure play hydrogen stock. Yet, with this company attempting to gain an edge over EV powerhouses like Tesla (NASDAQ:TSLA) with hydrogen-electric, rather than battery-electric, trucks, this is another name with exposure to the overall hydrogen megatrend.
But, while this stock benefited tremendously from the bubbles in both EV stocks and hydrogen stocks, recent developments have pushed shares lower in the past month.
Earlier this year, when Nikola went public via a SPAC (blank-check company) reverse merger, investors piled in, looking to get in on the ground floor with the next Tesla.
Shares cooled off through the summer. The stock started to come back in September, on news of a partnership deal with General Motors (NYSE:GM). Then, everything turned on a dime.
In the weeks that followed, shares fell around 50%, on the heels of a scathing report from short-seller Hindenburg Research. Hindenburg accused the company and its founder, Trevor Milton, of parlaying “an ocean of lies” into its deal with GM.
Sure, despite the controversy (and the abrupt exit of Trevor Milton), the partnership deal is still on the table. Yet, with the legacy automaker renegotiating the terms, it may gain the upper hand.
Yes, NKLA stock could be a long-term winner, if the company manages to disrupt the trucking industry. But, given shares could fall even further if both the EV and hydrogen stock bubbles pop, it may pay to wait things out for now.
Plug Power (PLUG)
Despite many valid points, the bears haven’t been able to stop Plug Power. The hydrogen fuel cell powerhouse has proved its critics wrong. And those bullish on the stock have laughed all the way to the bank. Shares are up nearly six-fold since March.
Yet, the aforementioned EV and hydrogen bubbles can’t last forever. Sure, the EV bubble that has sent Tesla and other plays through the roof hasn’t exactly popped just yet. Major names in the sector have pulled backed from their highs, but have yet to crash.
However, as I recently discussed, there are many red flags that could push PLUG stock back to single-digits. Granted, investors haven’t cared too much about these risks so far this year.
But, these chickens (dilution, precarious use of vendor financing) could soon be coming home to roost. More importantly, as Citron Research pointed out in August, the company could miss revenue targets by 40%. If this projection play out, and the company’s growth story gets completely derailed, expect an epic move lower.
In short, take the money and run with Plug Power. Sell into strength, as today’s price levels (around $15 per share) may not last for long.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.
