Saturday, October 17, 2009

Is Headwaters Emerging From The Cellar?

If you want to be in a dangerous market with a dangerous stock, take a look at Headwaters (HW). This company was a good looking prospect back when oil began its relentless climb in '04 and '05. They have proprietary technology for CTL (coal-to-liquids) that converts coal to gasoline. In North America, we have an abundance of coal, so CTL is a serious alternative energy. But, unfortunately, it's not an alternative to CO2. Depending on what study you look at, CTL greenhouse gas emission is about a wash relative to crude refined gasoline. And burning coal instead of chemically converting it puts out about double the amount of CO2.

So it's an alternative energy with problems and needs government help. In response to this, Headwaters didn't like being dependent on that government help for a single product and diversified into home building products such as stone and trim materials, and also a coal combustion byproduct cement. Well, catastrophe happened to all of that as the government help expired and housing went bust. The stock has been smashed down to single digits and they currently sport a negative $14 per share earnings on a $5 stock. So buy now? Well, a turn may be forming. The price/cash flow is a very cheap 2, their bottom line has actually turned positive as of the June quarter, and the chart is telling me a serious turn wants to happen: (click to enlarge)

This stock has not done much of a recovery bounce still being down over 30% on the year. But it has just broken back above its 200 dma and a 50/200 cross has just formed. It's also breaking the classic pennant formation with convincing volume on more than just a one day spike. On the negative side, it's way too noisy and will probably follow any market weakness that's ahead. But it could do a quick 20% or more before a weak market overwhelms it.

There are two main crude oil alternatives to carry America across the bridge to a post-fossil future - natural gas and clean coal. I've been writing about the dire need for a massive switch to nat gas for years now including a post here "The Bridge Is Out". It does my heart good to see people like Richard Kinder of Kinder Morgan Energy Partners (KMP) and Jim Cramer of Mad Money along with a growing lobby in Washington starting to beat the drums for nat gas to compete with what Cramer calls the Black Lung Coalition for the big coal companies.

I think nat gas is the better choice because it is much cleaner and is the best weapon we have to immediately cut way down on all pollutants including CO2. Whether you believe CO2 is a real problem or a political hoax, the fact is any oil replacement that's a CO2 problem is not going to get implemented. Thus we have the huge carbon capture problem with any coal solution. Headwaters is tackling this problem by forming a joint venture with the University of Utah in carbon capture. If they ever come up with a clever way of dealing with CO2 (other than parking it in underground caverns), CTL could become a rocket ride for all American stocks involved. They use CO2 in secondary oil field recovery and in CBM recovery. But maybe they could start using it to make soda pop for the martians and shoot it into space or something. Rentech (RTK) in America and Sasol (SSL) in South Africa are two other CTL stocks. Sasol has been powering about half their country's planes with coal derived fuel for years now without carbon capture, but that probably could not happen in America.

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