“Les doutes sont fâcheux plus que toute autre chose.”
(“Doubts are more cruel than the worst of truths.”)
According to wikipedia Andrew Edward Left is an activist short seller, author and editor of Citron Research, formerly StockLemon.com. Mr. Left is obviously clever enough to have translated the name of his research report into French. If I may, I would like to continue in this vein (for fun) and refer to Mr. Left interchangeably as Monsieur Gauche. Tuesday, M. Gauche‘s Citron put out a report on Plug Power in which it took issue with the high-flying fuel cell company and sought to point out its many faults. We did not ask for this report, so why did it issue? Well, M. Gauche is a short seller so incidental to the public service he performed by issuing his report, he stands to make money if the stock of Plug Power drops, which it sure did. He chose the moment of a recent high to issue a report that he hoped would slam Plug’s stock price and he succeeded.
Interestingly, Jim Cramer’s post market commentary Tuesday on CNBC cited the need for fuel cell stocks to be brought lower in order for the market to advance. I had no idea that the fuel cell industry was so closely aligned with the overall market’s ability to advance and I doubt many other investors did either. What is notable is that bringing the fuel cell industry low brings America low since we are a leader in the technology. Advancement and adoption of this technology may do as much to avert future loss of blood and treasure on battlefields of oil producing nations as it does to advance energy needs and productivity both here and abroad. Mr. Left makes his money destroying value and there is little evidence to refute that. According to his website and other sources, he and his Citron have taken aim at various companies that were involved in outright frauds and so on. Mr. Left may be commended for any efforts in that regard but he deserves no medals or honors because these efforts are central to his trading strategy and have presumably enriched him and those who may act in concert with him.
In order to succeed, M. Gauche does not have to be accurate. He just needs to effectively sow the seeds of doubt for a certain period of time: the time between opening a short position and covering it at a lower price. We will call this the “Period of Doubt.” He does this masterfully. Let’s take a look at the seeds of doubt sown in Tuesday’s Citron (we are not going to refer to it as a report):
First syllogism: Andy Marsh gets his guidance wrong on occasion, ergo he is a liar. Really? I’d say Mr. Marsh (ok, I guess I’ll have to call him “M. Marais“) is an enthusiastic (maybe a bit overly enthusiastic) CEO. If I’m picking a CEO, I pick the optimistic guy all day long over Eeyore the Donkey. Plug is still in its infancy and it is not always possible to get a clear picture of when things will break decisively in its favor but it sure looks like that process is underway. I am going to give M. Marais credit for that and also give him some latitude on guidance. We will all have a chance to look at this company perform and see who is right over the next 18 months.
Second syllogism: Ballard Power Systems sells fuel stacks to Plug so this must mean Plug has no IP and no real value of its own. This is like saying Apple has no value because somebody else makes the chips in their products. We like Ballard and we have nothing against Canadians (except in Olympic ice hockey), but this seems like a red herring to us. Plug is selling entire solutions, has its own patent portfolio and certainly lots of know-how. It is also a sale-oriented organization, for a change. Pointing out Plug’s own risk factors regarding not being able to rely on technology to compete is pretty easy to do. Check the 10-K or prospectus for any tech company and there will be loads of risks cited about not being able to rely on IP, IP litigation risks, etc. Not that persuasive when viewed in isolation.
Third syllogism: Plug can only sell its products because there are tax incentives for fuel cells. Existing incentives expire at the end of 2016. At that time it is likely that Plug will have booked the $350M (including sales and service) in revenue for 2017 that Cowen and Company analyst Rob Stone has predicted. The reason Congress sets sunset guidelines on things like incentives is that incentives by their very nature are intended to induce adoption. As industry needs change in coming years there is little doubt we will see new bills offered to address them. That is simply how it works.
At a price-to-sales ratio consistent with emerging energy technology the recent PLUG run-up may seem like child’s play at the end of 2016. That’s the point of the Citron though, it is intended that one’s head be swimming in doute. (Was I really born in the US on the day my Mom said? Maybe my passport is a forgery and I was born in Africa along with our President?) Now that I start doubting, maybe I better sell my house today in case the market crashes when our paralyzed Congress acts to eliminate the mortgage interest deduction (which of course they have failed to do for the past 40 years). Will eliminating tax incentives for clean energy be the first thing Congress does this session? Hmm, I guess we’ll see.
Bold unsupported valuation assertion: The recent purchase of shares in the Cowen offering is not indicative of the true Plug value (pay no attention to the man behind the curtain). M. Gauche’s methodology for determining price: take the prices of three stock offerings, which pre-date the announcement of the recent Walmart deal, and divide by three. Ever heard of this methodology? Me neither. That is kind of like an NBA star determining the average likely future height of his three kids by taking the average height of his kids two years ago when they were 3, 6 and 9. Probably better to just take a look at how tall Mom and Dad are and then hazard a guess about how tall the kids will be when they grow up. Sticking with the NBA analogy, I think that the “pick three and divide by three” valuation method using old data is kind of like trying to figure out whether an NBA star is valuable based on his high school career. Would you pay $1,000,000 for the marketing rights to a tenth grader who was cut from his high school varsity team? Me neither. What if I told you this tenth grader was Michael Jordan who was cut from his varsity team as a sophomore? Why should I care what Plug stock sold for before they turned the corner? Answer: I don’t.
M. Gauche gets it right a lot. He also gets it “wrong.” (So do I.) But he does create a Period of Doubt. The most apt comparison to Plug may be that of Tesla Motors, another company involved in ground breaking innovation. Tesla was “citroned” in August of last year, hiccuped all of about a minute and is now trading 50% higher.
So, for those of you who haven’t already headed for the sortie based on M. Gauche‘s recent seeds of doubt, ask yourself why you invested in Plug and if you think M. Gauche‘s valuation of Plug was meant for your benefit or his. Another article I read on this very point is instructive. My group is still long and quite frankly viewing Plug and others as being at the very start of an upward trajectory. BTW, if you want to accuse us of having a long-biased objective and agenda, let me beat you to it: yes, we are always long, never short. We talk about companies we like and where we see upside. We don’t want to destroy value. Not a nice thing to do in our view, even if profitable for some. Pretty sure America was not built by short sellers. For the record, we like PLUG, BLDP and FCEL at these levels.
These are our views only. We have based certain of these views on publicly available information which we have not independently verified in each case. As always, do your own diligence and do not rely on us for trading advice.