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Buy This Game-Changing Stock's Pullback For 50% Upside

Friday, December 13, 2013 - 7:00am

In any given year, you'll come across "no-brainer" investments that are universally loved by the crowd. Trouble is, these stocks can be loved too much, and no matter how sales trends develop, some disappointment will be inevitable.

Indeed, one of the most popular stocks of the past few years has lost its way, buried under a set of unrealistic growth expectations. Yet, as shares bounce just above multi-year lows, contrarian investors finally see an opening.

This "can't miss" stock is Westport Innovations (Nasdaq: WPRT), which appeared set to dominate the burgeoning market for truck engines that can run on natural gas.

The appeal is evident. Natural gas is far cheaper than crude oil, and truckers could save thousands of dollars a year by moving away from pricey diesel fuel.

Westport was also expected to benefit from legislation that provided huge subsidies for truckers to switch to natural gas. That legislation never arrived, and the company's most bullish supporters had to concede that the loftiest sales forecasts simply couldn't be met. As you can see in this chart, shares responded as you might expect.

There are four key reasons for this stock's slump.

First, sales are expected to rise more than 40% in 2014 to around $230 million, according to the consensus estimate, but that's still far less than the $275 million to $300 million 2014 sale base that some had forecast earlier this year.

Second, Westport has been slow to reach profitability. The company is on track to lose more than $2 a share this year, more than $1 a share next year, and may not become profitable before 2016. Designing and developing natural gas engines has been costly, and the company likely needs a quarterly sales base of $85 million to break even.

Third, Westport has inked a series of very impressive partnerships with companies such as Cummins (NYSE: CMI), Volvo, Caterpillar (NYSE: CAT) and others, but every one of those relationships is off to a slow start in terms of engine sales.

Lastly, Westport once again sold new shares to raise money in late September, continuing a process of seemingly endless dilution. Those serial capital raises have led shares outstanding to rise more than 150% since 2008 (to a recent 63 million), and some investors have become convinced that this company will just keep going to the well for more money.

If you've been tracking Westport in 2013, then you've seen the frustration for investors steadily mount. Second-quarter sales of $35 million were more than 10% below consensus forecasts. As a result, the company lost $0.61 a share, even worse than consensus estimates of a loss of $0.49 a share. Third-quarter sales of $46.5 million were more in line with forecasts, but another $30 million loss was hard to swallow.

The good news: Investors have reined in their expectations, and the era of weaker-than-expected results has likely come to an end. Quarterly losses should shrink over the next year or two, and the path to breaking even will finally come into focus.

Equally important, it's now quite likely that the company's continual capital raises have come to an end. Westport has roughly $300 million in cash, and management believes that that is enough money to buy time for the company to reach its break-even point.

The money isn't simply there to support production. It will also be used to pursue a number of initiatives that will help cement the company's technology leadership in this still-emerging industry. Those initiatives include:

-- $20 million-$40 million to develop natural gas injection systems
-- $20 million-$40 million to develop off-road and marine engines
-- $30 million-$70 million to develop a broader line of large-truck engines
-- $40 million-$50 million to fund production of key components at the company's suppliers

All of these moves will come on top of 15 years' worth of R&D spending that has yielded 300 patents. That explains why Volvo, Cummins, and China's Weichai, which all rank among the top five global truck engine manufacturers, have decided to pursue joint ventures with Westport rather than go it alone.

Of course, every broken stock needs catalysts to reverse the downward momentum, and the first of several has just appeared for WPRT. Westport just announced the release of version 2.0 of its high-pressure direct injection (HPDI) technology that will underpin the company's strongest and most fuel-efficient engines.

Analysts at Ascendiant Capital Markets believe HPDI 2.0 will not only appeal to truck makers, but also to "other high-horsepower applications such as mining and locomotives." News of this technology had been expected for nearly a month, and a lack of news led to speculation that the technology would be delayed, "which does not appear to be the case," according to Ascendiant.

The next catalyst is a launch of a Ford (NYSE: F) F-150 pickup truck in the first quarter of 2014 that uses Westport's technology to handle either natural gas or gasoline. Ford has offered natural gas engines on its heavy duty F-250 and F-350 trucks, but never before on the more popular F-150.

Lastly, Westport's 11.9-liter engines, which were launched last spring, appear to be finally seeing surging demand. Look for management to focus on this launch on the company's next conference call.

Make no mistake, this engine maker will continue to deliver a bumpy ride for investors. Quarterly revenues are likely to remain volatile, as the timing of orders and production scheduling continue to fluctuate.

But a broader view is still warranted. From an expectation of $240 million in sales in 2014, Ascendiant predicts sales will surge above $330 million by 2015. That sets the stage for Westport to finally reach quarterly break-even in late 2015 or early 2016. As long as investors once again come to see that path to break-even come into view, they will flock back to WPRT.

Though shares are unlikely to revisit the $45 range that was seen in early 2012, a move back to $25 or $30 looks quite feasible for this fallen star, potentially rising more than 50% from current levels.

Action to Take -->
-- Buy WPRT up to $22
-- Set stop-loss order at $17
-- Set initial price target at $27 for a potential 41% gain in six months

This article was originally published at
This Fallen Star Could Surprise Traders With 50%-Plus Upside

P.S. Westport Innovations was recently featured in my colleague Andy Obermueller's special report, "The 11 Most Shocking Investment Predictions for 2014," where it was predicted this company could make the gasoline engine obsolete. The rise of the natural gas engine isn't the only big event that could affect the energy sector next year. There's also a tiny biofuel company that is on the verge of revolutionizing the way we produce gasoline. To learn more about this company, and the rest of Andy's "The 11 Most Shocking Investment Predictions for 2014," click here.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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