Although we often like to think of ourselves as proactive people, the reality is that many of humanity’s innovations came about due to tragedies or disasters. Personally, with shares of FuelCell Energy (NASDAQ:FCEL) flying to the moon, I can make a case that I didn’t full appreciate the importance of FCEL stock until a calamity occurred.
As you know, 2020 won’t be solely defined as the year of the novel coronavirus. Instead, many catastrophic events occurred to heap salt on our festering wounds.
One that impacted me directly was the California blackouts this past summer. Suddenly, during a sweltering heat wave, millions of people in the Golden State were without electricity.
Frankly, it couldn’t have come at a worse time and of course, angry residents sought answers. Quickly, a rumor sprouted that California’s pivot toward renewable energy was largely responsible, with the green platform allegedly unable to cope with spike demand.
While a great story for the anti-climate change crowd, it’s not entirely accurate. Myriad vulnerabilities, including poor grid management, ultimately contributed to the blackouts.
However, as AtlanticCouncil.org points out, our recent love affair with renewable energy isn’t without fault. Because of its intermittency, green solutions couldn’t come up with solutions during crunch time.
However, this embarrassing event ended up supporting the fundamental case for FCEL stock. FuelCell is one of the pioneers of microgrid development, which provides backup power if a disruption impacts the main grid. Out of nowhere, people realized that no energy solution – whether green or otherwise – is complete without microgrids.
Sure enough, FuelCell warned everyone about the mission-critical nature of supplemental energy during crises early this year. In a press release, the company stated:
“The need for microgrids to improve grid reliability will continue to grow in its importance to deliver the benefits of always-on power. California utility regulators recently mandated Public Service Power Shutoffs (“PSPS”) in an effort to avert wildfires being sparked by transmission lines and/or transmission distribution equipment. Millions of Californians have lost power as a result of PSPS, leading to economic loss, hardship, and even more serious consequences…”
If only our elected officials knew. But does this make FCEL stock a buy now?
Why You Shouldn’t Chase FCEL Stock
Judging based on the news, FuelCell might compel some speculators to take a shot. When FCEL stock began its remarkable rally, we were just days away from the presidential election. As well, most pollsters predicted a relatively comfortable win for Joe Biden. A few days after the results came in, shares really started moving.
On one hand, it’s not shocking why. As you know, the Biden Plan calls for net-zero emissions by 2050. To get there will require an unprecedented level of investment, which augurs well for the whole industry. Thus, the rising tide lifts all boats philosophy gave FCEL stock a boost.
However, Motley Fool contributor Scott Levine pointed out that there was no company-specific news for FuelCell. Therefore, Levine argued that investors likely reasoned that the sector would indiscriminately bolster all renewables play. Based on this assumption, rookie buyers bought FCEL stock as a “discounted” play off the enthusiasm toward Plug Power (NASDAQ:PLUG).
But as Levine stated, PLUG had justification for its optimistic price action, most conspicuously its underlying impressive third-quarter earnings report. With FuelCell, this was more of a ride-along scenario.
FCEL and Plug Power
Mathematically, I see little reason to chase FCEL, despite its microgrid business unit’s fundamental relevancy. From the beginning of January through Oct. 29, FCEL and PLUG shared a 56% correlation coefficient. Though some correlation exists, the strength wasn’t such that it was remarkable.
But from Oct. 30 through Dec. 4, the narrative completely changed. Now, the correlation coefficient is nearly 79%. That certainly is significant, which tells you something: FCEL stock is likely driven by the fear of missing out (FOMO).
Moreover, FuelCell made a very quick jump from trading where it was in early November to being up more than 400% at the peak this year. On the other hand, PLUG made a progressive journey to being up 400%-plus.
Simply, one company had the financials to back up its enthusiasm, while the other was capitalizing on fortuitous momentum.
Check the Financials Before You Decide
According to Yale Climate Connections, there are many opportunities associated with fuel-cell-related clean energy solutions. At the same time, challenges associated with integrating these solutions in an economically sensible manner has historically dogged the industry. Therefore, many green investments tend to have a lot of red in their books.
That said, some books are redder than others. True, Plug Power isn’t a bastion of stability. However, if you look at its Altman Z-Score, it currently ranks at 6.13, which is in the safe zone. Unfortunately for FuelCell, its score is 1.05, indicating distress.
Don’t get me wrong – I’m not trashing FCEL stock (because I learned my lesson). Rather, if you trade shares, you’re doing so as a speculative bet. And if you want my opinion, I’d wait. The valuation is way overheated for most investors to be comfortable with.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.