The magic has finally worn off for companies like Plug Power (NASDAQ:PLUG). The growth group has seen a painful decline over the last few months. As a result, PLUG stock has fallen 70% from its high on Jan. 26.
That highlights some of the dangers of when the markets get frothy.
Obviously this hasn’t been an easy investment period. Just over a year ago, we endured the start of a global pandemic. Case counts and death tolls were climbing and the world was shutting down. It created a tectonic shift in supply chains, technology and investment.
It also created an enormous amount of uncertainty. That uncertainty pummeled the stock market. However, not many were expecting such a robust recovery in equities. That led to an explosive move in electric vehicle (EV) stocks, as well as renewable energy, solar and others.
While I am bullish on EVs for the long term — and have been since the pre-coronavirus days — that doesn’t make every stock a buy. We have to be selective with our investments.
Why We’re Passing on PLUG Stock
You might be thinking, “What does the pandemic have to do with PLUG stock?”
When we had that enormous decline, followed by an even more enormous rally, it sucked in a lot of investors. Money poured into the markets and frothiness ensued. Investors were willing to pay any price for the stocks they owned, whether they were high quality or not.
Ironically, high-growth stocks are now getting crushed from the highs regardless of whether they are of high quality or not. In these cases though, one rule of thumb stands out: The deeper the dip, the lower the quality.
That’s true for Plug Power.
Interestingly, this company actually has solid growth projections. Consensus estimates call for 40% revenue growth this year and an acceleration up to 55% growth in 2022.
While those growth rates are impressive, the valuation is still an issue. That’s particularly true when growth stocks are in a bear market.
Consensus expectations for 2021 call for $472 million in revenue this year. With its market capitalization of $13.5 billion, that still leaves PLUG stock trading at roughly 28 times this year’s revenue. That’s expensive during a good time — like during a bull market. During a bear market, that’s not good, even if the stock is down 70% from its highs.
Now do you know what I meant by saying investors were “willing to pay any price?” Consider the valuation now and realize that at its highs, PLUG stock was trading at 65 times this year’s revenue estimates.
That’s insane.
After the carnage we’ve seen in high-growth stocks, I’d rather scoop up bargains in high-quality names rather than chase the big losers like Plug Power. They simply offer a better risk-to-reward opportunity.
Another Reason to Avoid Plug Power
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It’s hard to believe the valuation for this stock is still so high despite a massive decline in the stock. Yet, there are other reasons besides the valuation to avoid this name for now.
For starters, Plug Power is not free cash flow positive. It’s also not profitable. When it comes to growth stocks, these metrics are not exactly prerequisites. However, when the proverbial crap hits the fan, investors will want to hunker down in the stocks that have stronger financials.
The better the financials, the better these stocks tend to hold up.
An unprofitable, negative cash flowing entity with an astronomical valuation is not somewhere we want to park our money. A year ago, the balance sheet did not look so hot.
Total assets barely edged out total liabilities, although Plug Power wasn’t exactly a going concern. Its balance sheet was okay, but nothing special.
To management’s credit, the balance sheet does look much better now. Total assets are roughly 2.6 times larger than total liabilities, while current assets are roughly seven-fold the company’s current liabilities.
That is good news, particularly now that the stock price has been decimated.
However, a good position on the balance sheet does not mean PLUG stock is a good investment. The other issues with the stock outweigh this observation and let’s be honest: In a period with so much “easy money” and low interest rates, it’s hardly the only company with staying power on its balance sheet.
The verdict? Let’s take a pass on PLUG stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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