It’s really no surprise FuelCell Energy (NASDAQ:FCEL) stock has soared to the moon in the past month. After all, other clean energy stocks, like Plug Power (NASDAQ:PLUG) have surged since election day, as the incoming administration could be a boon for the sector.
Yet, as the “Biden boost” starts to fade, now’s not the time to jump into this provider of hydrogen fuel cells (HFCs) for power generation. Why? Multiple reasons. Firstly, the recent share offering, which brings up concerns about both dilution and insider selling. Secondly, the company’s balance sheet and valuation issues.
So, while it has a bright future ahead, it’s clear FuelCell shares have gotten a bit ahead of themselves. However, that’s not to say now’s the time to go short this stock. It won’t take much to push shares even higher in the near-term.
Yet, with this stock more of a gamble than an investment, the answer’s clear: stay away. Look at more solid “green” opportunities out there, as it’s hard to tell whether shares are heading higher, or lower, in the coming months.
The ‘Biden Boost’ May Not Last for FCEL Stock
As mentioned above, it’s the election of Joe Biden as U.S. President that’s fueled the recent interest in FuelCell. As InvestorPlace’s Sarah Smith wrote last month, the President-elect’s proposed policy changes bode well for this hydrogen play’s prospects.
Why? Individuals and businesses have been pushing for the move to “go green.” But now, with a more pro-green administration, we may start to see actual changes to America’s energy policy. Namely, mandates that call for the phasing out of fossil fuels, in favor of clean energy.
Obviously, that type of large-scale shift could change the game for FuelCell. Yet, while its prospects are much better now than just a few weeks back, don’t expect the recent “Biden boost” to last.
Why? There are several factors that may convince investors to bail out of FCEL stock. In fact, one has already started to have a negative impact: the company’s recent share offering. Sure, while this transaction is dilutive, this may not impact potential gains that much in the long-term, if things play out as currently predicted.
Yet, dilution is only one issue on the table. Along with insider selling, as well as balance sheet/valuation concerns, there’s plenty to cause this hot stock to give up its gains in the immediate future.
Insider Selling, High Debt, and Valuation Concerns
As InvestorPlace’s Louis Navellier discussed Dec 3, the recent equity offering included not only the sale of new shares, but the sale of existing ones by insiders as well. Do you really want to buy when insiders are looking to sell?
Granted, this negative development may already be priced into the stock. Shares quickly dropped from around $10 per share, down to below $7 per share. But, in recent days, the stock has began to recover, with shares changing hands above $8 per share today. Yet, FuelCell’s risks don’t end with this recent development. There are other concerns that could send shares on a downward trajectory as we enter 2021.
Firstly, issues with its balance sheet. Sure, by selling new shares of stock, the company’s improving its balance sheet, which includes not only high debt, but outstanding preferred stock as well. With this in mind, additional capital raises are likely in the future. Given how badly investors reacted to the recent one, additional sales could have a further negative impact.
Secondly, valuation does not look sustainable.. FCEL stock sells at a price-to-sales (P/S) ratio of around 24.1, a figure that makes many of the richly-priced EV stocks look “cheap” by comparison.
Even when factoring in sales growth, this valuation looks ridiculous. Unlike some of the growth stocks out there growing at a 50%, or even 100% clip, FuelCell’s sales are only expected to climb from $70.4 million in fiscal 2020 (FY ending Oct 2020), to $87.7m in FY21.
Sure, that’s not say there isn’t a big growth story here. As JP Morgan analyst Paul Coster put it in his downgrade of FuelCell last month, the story won’t really start to play out until 3-5 years from now. But, for now, shares have moved up too far, too fast.
More a Gamble Than an Investment, Look Elsewhere for Opportunity
Given the aforementioned negative factors, many may think this stock is a compelling short. Think again. It may take just a moderately positive development to send shares soaring yet again. However, that’s hardly a reason to go long today. With its price action driven by speculation, rather than fundamentals, this is more of a gamble than a sound investment.
Bottom line: with more solid “green” opportunities out there, don’t try to predict the next move for FCEL stock.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.