At $21 per share, where’s FuelCell Energy (NASDAQ:FCEL) stock headed next? Despite mixed earnings results, investors remain confident in this richly-priced green-wave play. Why? With President Joe Biden’s $2 trillion clean energy plan seen as a possible boon for the hydrogen fuel cell (HFC) space, bulls on the stock aren’t too worried about near-term results.
Instead, they see this company, founded more than 50 years ago, finally on the verge of becoming an overnight success. But, there’s no guarantee it’s on the cusp of something big. And, even if it is, that doesn’t necessarily mean the stock has significant runway from today’s prices.
Why? Just like with other “winning” sectors in the last year, markets have priced in potential growth for green-wave names. And then some. With expectations inflated, shares in this space have lots of room to fall if they fall short.
Or, if we see an across-the-board correction. Admittedly, trying to call a top in any bubble is a fool’s errand. And, in today’s dangerous market for short-sellers, betting against the crowd doesn’t look to be the winning move, either.
So, what’s the play? Avoid it for now, whether on the long side, or on the short side.
Why FCEL Stock Is More Likely to Pullback
It’s hard to justify a buy of FuelCell shares at today’s prices based purely on fundamentals. Sure, you can argue shares will continue to gain, as Biden’s green new deal lite comes to fruition.
But, as our own Matt McCall discussed back on Jan. 15, to what extent this company will benefit from clean energy policy changes is debatable. For the time being, the company doesn’t have much on its plate for the coming year. That’s not to say the company isn’t growing. But, when you compare it’s expected revenue growth this year (26.6%), said growth is less than the projections seen with names like Plug Power (NASDAQ:PLUG), which is expected to see its sales grow by 37.7% in 2021.
Putting it simply, FuelCell isn’t in the same league as Plug Power. As a Seeking Alpha contributor broke it down recently, while Plug is leveling up, this company is having to fight to hold onto its existing business as much as it’s crushing it in the growth department.
Yet, FCEL stock trades at a premium valuation. Its forward price-to-sales ratio (79.3x) is a fair amount above Plug’s forward price-to-sales ratio (69.9x). But, valuation alone isn’t the only concern with this over-hyped stock.
Back in December, I discussed other red flags with FuelCell, including heavy insider selling, and shareholder dilution. Put it all together and it’s hard to see shares hold onto their Biden boost gains, much less rally significantly higher (like up to $40 per share) from here.
Once the bubble bursts, it’s easy to see this crater back to single digits. That being said, shares cold hold up (or even head higher) in the near term.
Yet, the Mania Could Continue
When (not if) the bubble in green-wave stocks bursts, weaker plays like FuelCell have the most room to fall. However, this alone may not make it wise to bet against it. Even as shares change hands at unsustainable prices.
As you likely know, now’s a bad time to be a short-seller. With retail investors bidding up heavily shorted stocks, beating Wall Street at its own game, betting against stocks on fundamentals isn’t working right now.
Sure, FCEL stock doesn’t have the levels of short interest seen with names that have seen extreme short-squeezes in recent days. But, as stocks continue to trade divorced from fundamentals, I don’t see this richly priced stock crashing anytime soon.
Coupled with this is the potential for additional positive green-wave developments coming out in the next few months. Biden’s recent executive orders may be just the start of how much America’s energy policy changes in 2021.
“Buy the rumor, buy more on the news” continues to be a strategy that works in today’s stock market. While I don’t see shares doubling yet again, a continued move higher before the music stops looks to be a possibility.
Bottom Line: Stay Away from FuelCell
Recent clean energy policy changes could change the game for this hydrogen fuel cell company. But, it remains to be seen how much it’ll benefit, and whether this growth is already reflected in its currently inflated stock price.
That being said, as “story stocks” continue to trade on everything but their fundamentals, it’s not worth trying to bet against FuelCell right now. Yet, with the risk of shares falling back to single digits exceeding the chances of another parabolic move higher, there’s little reason to enter a position at $21 per share.
Bottom line: with risk/return not in your favor (on either the long or short side), avoid 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.
