Bears Turn Up Plug Power Bets as Fuel Cell Hype Fades: Options

Options traders are loading up on bearish bets on one of this year’s best stocks: Plug Power Inc.

The company, an unprofitable maker of fuel cells, has seen its shares surge almost 3,000 percent in the past year on signs the technology is a viable source of electricity. In the options market, there are 63 put contracts on Plug for every 100 calls, compared with a ratio of 3-to-100 at the beginning of the year, according to data compiled by Bloomberg.

"Any 3,000 percent move for a company that does $25 million in revenue a year is purely speculative," said Robert Stimpson, a fund manager at Oak Associates Ltd., in an interview from Akron, Ohio. His firm manages about $1 billion and doesn’t own the shares. "They’re unsubstantiated and unsustainable rates of appreciation that fail to live up to the hype."

Plug shares sank 7.7 percent to $5.51 at 11:56 a.m. in New York, headed for the lowest level in three weeks.

The rout in Plug may have already started with the shares down 42 percent since short-seller Andrew Left at Citron Research called it a "casino stock" and questioned the company’s forecasts in a March 11 report. Plug Chief Executive Officer Andrew Marsh declined to comment on the note and said the company is headed for profitability on orders from Wal-Mart Stores Inc. and BMW Manufacturing Co.

Fuel cells use hydrogen or natural gas to produce electricity through a chemical reaction. The technology has been under development for years, and Plug and its peers are starting to report growing commercial sales. The company generated $26.6 million in revenue in 2013 and is projected to reach $65 million this year, based on the average forecast of two analysts tracked by Bloomberg.

Short Selling

Speculation the gains won’t last has led investors to borrow and sell 11 percent of the stock outstanding in a bet on declines, compared with 2.4 percent in September, according to data compiled by Markit, a London-based provider of financial information. The proportion of short interest in Plug is almost four times higher than the average company in the Nasdaq Composite Index.

The company’s shares have risen 285 percent this year to $5.97, compared with a 3.4 percent increase in the Nasdaq Composite. More than 27 million shares changed hands yesterday, making it the 15th-most traded stock in the U.S., according to data compiled by Bloomberg.

Powering Forklifts

Plug expects orders of more than $150 million this year for its fuel cell-powered forklifts, almost four times the 2013 total, CEO Marsh said in a March 13 statement. He forecast a adjusted profit for 2014, before interest, taxes, depreciation and amortization, and stock-based compensation.

Wal-Mart agreed to install more than 1,700 hydrogen fuel cell systems at six North American distribution centers, Latham, New York-based Plug said in February. BMW Manufacturing increased its fleet of trucks and forklifts powered by Plug’s fuel cells to 275 from 100, according to a release from June.

It’s unwise to speculate on Plug because there’s so much volatility in the stock, said Brian Huen, managing director at Red Sky Capital Management Ltd. in Toronto. Last week, the stock rose as much as 25 percent in a day and fell as much 42 percent.

"We don’t want to short them because of the momentum, even if the expectations on some of these stocks is crazy," Huen said in a phone interview. He helps manage about C$225 million ($200 million) at the firm. "You just don’t want to stand in front of a moving train."

50 Cents

Plug tumbled 42 percent on March 11 after Left, an executive editor at Citron Research, said the shares are worth 50 cents. He also raised concern that sales will slow when a federal investment tax credit for customers that use its systems expires in 2016.

Marsh, Plug’s CEO, said he has never spoken to Left. He said about 30 percent of customers don’t use the tax credit and will be able to compensate by lowering costs and increasing profits by 2016.

"I see almost unlimited growth possibilities for the company," Marsh said in a March 14 interview. "I consider us pioneers in this industry, and that’s why people should be long-term holders."

The company currently buys fuel-cell stacks from Ballard Power Systems Inc., based in Burnaby, British Columbia, and plans to source the components from a second supplier and also begin making its own this year. Costs have declined by 10 percent to 12 percent a year, Marsh said in a conference call earlier this month.

Continued Volatility

Among the 10 options with the highest ownership, six were calls, according to data compiled by Bloomberg. March calls, which expire today, with a strike price of $7 and $10 had the highest open interest.

Implied volatility, used to gauge the price of options, for three-month contracts with an exercise price 10 percent below the shares is 119.97, according to data compiled by Bloomberg. The measure for calls is 116.93.

The Chicago Board Options Exchange Volatility Index, which measures the cost of options on the Standard & Poor’s 500 Index, lost 4.5 percent to 13.87 today. Its European counterpart, the VStoxx Index, slipped 4.1 percent to 17.39.

"Plug is one of those ones that got caught in the frenzy with fuel cells," Fred Ruffy, a Chicago-based senior options strategist at Trade Alert LLC, said in a phone interview. "Options market participants are pricing in continued elevated volatility."

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