I spent the weekend in New York enjoying the overwrought holiday scene with my family, and I must admit to being delighted to catch a Broadway show and see the Radio City Music Hall Christmas Spectacular for the first time, but though I’m now fully immersed in holiday merriment I must confess that nothing quite warms the heart like sleuthing out a “top secret” stock pick for you.
So let’s get to another one, shall we? This time it’s a pitch from the Motley Fool’s Hidden Gems newsletter, which has been sort of a quiet underachiever in recent years — this is the Fool’s small cap “value” newsletter that used to be run by Fool founding brother Tom Gardner, but it has been through a series of editors since he refocused on other things. In the early 2000s the letter was a solid market-beater much of the time, with picks like Middleby (MIDD) and Chipotle (CMG) doing spectacularly well, but according to Hulbert they had a few weak years following the market crash — until this year, when they have again been beating the market average.
This teaser pitch was written by one of their analysts, a biotech guy named Dr. Max Macaluso, which is pretty typical — recently the Fool has started using teaser pitches signed by folks other than the newsletter editors and stock pickers, I don’t know why … other than that it helps to further differentiate the hype-filled promise of the ad from the real and hopefully more sober analysis published in the actual newsletter. Here’s how Dr. Macaluso gets us interested:
“Imagine how much money you’d stand to make if you found a way to pull…
“Endless oil straight ‘Out of Thin Air’ …
“Sound impossible? I thought so too until I heard this…
“It’s more than 10 times cleaner than petroleum oil, works in exactly the same way, and its production (which takes only a couple days) is virtually unlimited. No wonder industry insiders are calling it ‘The New Petroleum.
“Billionaire entrepreneur Richard Branson of Virgin Group leaped at the chance to make a recent investment, proclaiming this radical new oil “Will play an important role in our future.”
“Continental Airlines just used it to fly a jet airliner from Houston to Chicago… and its parent company United was so thrilled they immediately locked in a contract for further delivery of 20 million gallons of fuel per year.”
So what’s the idea? Well, there’s a long presentation going into all of the reasons why this upstart will turn the massive energy business upside down, how it has the upside of “four Microsofts put together” and about how the process can create oil in just a few days, here’s a bit more for a taste:
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“… it has industry experts saying this radical oil could help put the world on a cleaner, more energy-efficient road to the future.
“In fact, independent energy research firm Life Cycle Associates found it can reduce greenhouse emissions by a mind-bending 93%.
“OriginOil simply calls it ‘The ideal replacement for petroleum.’
“To put it in context, this is such a large-scale phenomenon that entire generations could go through life without witnessing something comparable…
“And as you can probably imagine, whatever ends up replacing petroleum as the world’s primary source of fuel would almost certainly make early investors tens of thousands of dollars with relative ease.
“Possibly even hundreds of thousands. Maybe even more…
“To put it in perspective, MarketResearch.com — the watchdog of emerging markets sectors — sees the potential for a multi-hundred billion-dollar market opportunity within the next few years alone.”
The Fool even pulls in Clown Prince Jim Cramer for an endorsement:
“… this astounding technique was actually developed by a publicly traded company.
“A tiny Silicon Valley company that’s already erected a Fort Knox-like 300-patent fortress around their ‘oil out of thin air.’
“To put it in perspective, they have more patents than employees.
“So it’s no wonder Jim Cramer ran a special segment on his TV show Mad Money to specifically call attention to their ‘Competitive advantage with many layers of patents and trade secrets.'”
There’s more, of course — lots more. But that’s plenty for us to throw into our Mighty, Mighty Thinkolator — and once it churns and chews a bit we learn that our answer is: Solazyme (SZYM — free trend analysis here)
And yes, it was covered by Jim Cramer as a “speculative” stock that his viewers had asked about, but the coverage on Mad Money was in March, 2012, less than a year after Solazyme went public in the Summer of 2011. You can see his coverage here if you’re curious. Back then the stock was around $12 and his attention helped to drive it up to about $15 as he called it a “terrific speculation,” but it’s been mostly downhill from there with the stock dipping to $7 or so, bouncing back up to $12, and then falling back down to where it is now between $9-10.
We can certainly agree that Solazyme is speculative — this is a company with a cool technology in their ability to create biodiesel by harvesting it from giant tanks full of sugar-consuming algae, and they have (or have had) lots of primo partners in Bunge, the US government, Chevron and others. But it generates very little revenue so far, and is probably quite far from ever generating a profit.
Solazyme’s unique proposition, as I understand it, is that they don’t produce oil using photosynthesis like the land-intensive algae pond operators do, they couldn’t make that work in volume. They produce oil in dark tanks using sugar, so they have heavy input costs in the form of tonnes of sugar (there’s an interesting piece from SeekingAlpha on that here, I haven’t checked his facts), but it seems that the immediate hopes for Solazyme rest far more with high value-added oils for food products and cosmetics that earn a much higher price — they can create fuel oils, but it’s hard to see how they could do so and be competitive with $100/barrel crude oil unless they have heavy government incentives. People will likely pay more for biodiesel that’s derived from alga, because premium “green” products can always garner a higher price, but that’s a strategy for a segment of the market, not a strategy for really upsetting a trillion-dollar market.
This is a key period of time for Solazyme, their big commercial plant openings (one in Brazil colocated with Bunge at a sugar plant, one at an Archer Daniels Midland facility in Iowa) are a bit delayed but are now supposed to come online in the first quarter of next year, so there will undoubtedly be substantial news out of the company in their quarterly announcements over the next six months or so … but it will still be speculative.
That doesn’t mean there’s anything particularly wrong with Solazyme, I don’t know the company well, it just means that they’re dependent on a process that’s inherently high-cost and difficult to scale — the only way to really quickly turn them profitable would be to license their technology to someone who wants to invest billions of dollars into massive algae plants. These new plants of theirs seem wise to me, they’re locating their production in areas where they can take advantage of cheap energy and proximity to feedstocks and a strong infrastructure run by their partner, and it makes sense that they’re targeting specialty markets for their expensive fuels since they can get multiples of the crude oil price for nutritional or industrial oils, but I have no idea if or when Solazyme will ever become a profit-making enterprise.
They’ve got enough cash to keep going for a while thanks to a substantial debt offering this year, they will see additional cash flow as their facilities come online in the coming months, and they have solid management and a cool technology and lots of patents, but I don’t know them well enough to predict when or if they’ll start to make investors happy again. Analysts are predicting that revenues will quadruple next year, but that the company will still be losing a dollar a share.
Oh, and yes, several investors have noted that there’s a long stretch to go before profitability — SZYM has a pretty hefty short interest of about 17% of its shares, so that could help pop the stock up if they get surprisingly good news and those short sellers have to cover … but that also means a lot of folks are betting pretty heavily on SZYM being a bad investment. If you’re interested in Solazyme and have an opinion to share, feel free to shout it out with a comment below.