Why I'm Doubling Down on This Risky Stock

I don't consider myself a high-risk investor. I've never owned a penny stock, I like companies that are industry leaders in emerging businesses, and I'm always on the lookout for a good value. But that doesn't mean I'm not willing to take a risk from time to time when an opportunity presents itself.

It all starts with a story
Usually an investment starts with a good story. I used to tell coworkers who were getting started with investing that if they couldn't tell a compelling story about why they were invested in a company, they shouldn't buy it. But there's a fine line between a good story and a story stock.

Take the recent IPOs of both Tesla Motors (Nasdaq: TSLA  ) and Zipcar (Nasdaq: ZIP  ) in the past year. Neither company is profitable, and neither probably will be for quite some time, but both had wildly successful IPOs. The sales pitch with these companies becomes about the story of what they could be, not about why you own them for what they are today. They're story stocks.

There's a fine line between story and  stock, and that's where my story begins. I started following American Superconductor (Nasdaq: AMSC  ) in 2009, when I was looking for alternative energy investments that could help revolutionize the industry. At the time, the company was just becoming profitable, but it was beginning to become more reality than story.

Over the next two years, I saw the company's profits skyrocket; it entered adjacent markets that seemed like a good idea. After building a large, and profitable, licensing and supply business in wind turbines, the company's namesake superconductor product got a few new contracts, and it added utility-scale inverters to compete with Satcon Technology (Nasdaq: SATC  ) and Power-One (Nasdaq: PWER  ) in the solar business. Finally, I saw enough value in current operations and a bright enough future to jump in. I made a small bet at first, but after the stock fell into the mid-$20 range, I bought more shares and even sold put options. 

Later, those options would become my downfall.

When the company revealed that Sinovel, its biggest customer, had rejected an order, and that the company hadn't been paid for past shipments, all hell broke loose. The stock dropped 50% in one day, and I went from a small loss to my worst-ever single day loss.

Now that we're here ...
The story of American Superconductor has changed, and I'll admit I've been wrong about this company so far, but the reduced stock price has also come into play. Sure, I would be more comfortable if I were sitting on a profitable position, but since the stock has tanked, I've been forced to re-evaluate my investment.

I still like the company's product lines overall. The wind business is tough, but management says it still plans on having Sinovel as a customer, and new customers are ramping production with American Superconductor technology. The superconductor cable business is just getting started, and inverters are a wild card. But all the while, I've kept my eye on the balance sheet.

At the end of 2010, cash and marketable securities stood at $242.9 million and debt was nonexistent. Unless the company is mothballed all together, the current $411 million market cap seems pretty low considering the potential. Of course there's the $265 million The Switch acquisition to fund, but assuming the business is worth what American Superconductor paid for it, investors are almost pricing in bankruptcy.

There are big risks. The company's regulatory filing has been delayed, and it's on notice with the Securities and Exchange Commission (not a good thing for any company). But when investors are looking for every reason to sell, I like to ask if there's still a reason to buy. And I think there is.

I've played this game before
This isn't the first time I've liked a company's story, watched the stock tank, and doubled or tripled my investment when I thought it was hitting bottom. In early 2009, gaming stocks with ties to a booming Asian market such as Melco Crown (Nasdaq: MPEL  ) , Las Vegas Sands (NYSE: LVS  ) , and Wynn Resorts took it on the chin because of concerns over their debt loads. The risk was high, but I felt investors couldn't see the full potential in Macau casinos through the market collapse.

I owned shares of LVS at the time, and I heard CEO Sheldon Adelson shouting from the rooftops that his company wouldn't fail, so I doubled down. That paid off over the next two years as Las Vegas Sands recovered what I had lost and much, much more. Maybe it was crazy; maybe it was genius, but it worked. Now American Superconductor is a company I don't see going belly-up. Not yet.

Why I'm staying long
Half (or maybe more) of investing is psychology. The stock market is like a mob that falls in love with an idea and throws it out on a whim. When a company is getting notices from the SEC and isn't talking because accountants are scrambling to figure out what everything is worth, the mob will trample its young to get away. But once fourth-quarter results are released (someday), and we hear what's really going on with Sinovel, I think we'll breathe a sigh of relief.

Have you lost your mind?
Catching a falling knife is nearly impossible, but if you're convinced the market has overreacted, it may be time to take a chance. A couple of weeks ago, I bought long dated call options, or LEAPS, in American Superconductor that could turn my investment around -- or become a further sinkhole for my portfolio. In either case, I know the risks, I'm willing to accept them, and I like my chances.

Am I crazy? You wouldn't be the first to think so, and if you agree or disagree let me know in the comments section below.

Interested in reading more about American Superconductor? Click here to add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium owns shares and call options in American Superconductor, has sold put options in Las Vegas Sands, and owns shares of Melco Crown that are covered with call options. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Power-One. Motley Fool newsletter services have recommended buying shares of Zipcar and Melco Crown Entertainment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 28, 2011, at 7:26 PM, TARACIE wrote:

    I've invested in AMSC wince early days when it was at $4.00

    I believe.

  • Report this Comment On June 29, 2011, at 12:10 AM, aldousworp wrote:

    I been through this a few times before with AMSC. It goes down. I buy more. It goes even lower. I'm out of dry powder. It goes back up. I wish I had sold something to raise money to buy more when it was near the bottom. I have far more than I should invest in a speculative stock but I don't sell. I went through this once when AMSC was in danger of being delisted. Their auditor issued a statement that they might not have enough cash to fund their burn rate for the year. I think it was 2003 or 2004.

  • Report this Comment On June 29, 2011, at 9:40 AM, iat88 wrote:

    i believe AMSC will overcome it s recent downfall. i have 2 reasons for saying this. Firstly there is a very high volume of insider buying of the stock . This shows the insider s believe in the fundamentals of the company and expect it s stock price to recover.

    Secondly i feel Sinovel s cancellation of their orders might be temporary. They might continue with AMSC as their supplier sooner or later . There is also the possibility of a buyover.

  • Report this Comment On June 29, 2011, at 3:50 PM, kfisch wrote:

    I recently bought AMSC after the Sinovel order cancellation. The fact that the company has strong fundamentals, in particular no debt, made it an attractive buy. The high volume of insider buying of the stock & large blocks bought by institutional investors further reinforce confidence in the company's ability to rebound from the Sinovel set-back. There could be something to the rumors of the AMSC being a take-over candidate seeing as how those in the company are buying so much stock. The stock is certainly priced right for someone to step up to the plate & hit a home run!

  • Report this Comment On June 29, 2011, at 4:48 PM, lslobovia wrote:

    there seems to be only one non-insider buyer who's been taking large amounts all the way down from the mid 20's. I'd be more comfortable if a company officer or 4 would buy now too.

  • Report this Comment On June 30, 2011, at 10:31 AM, picador3 wrote:

    A touch of denial here? Payment troubles with Sinovel started in the June quarter. AMSC made no mention of this but continued to report higher than forecast quarterly results and increase guidance. Then did stock offering in the Fall while indicating all was well. Securiies Fraud? Delay of annual report possibly the result of inability to get postive auditor's report?

    Parties suing the company will likely seek to freeze AMSC's cash to cover possible damage awards. If so acquisition may be aborted with further damages liabilities.

    Firing of Chairman not likely to help company.

    Bankruptcy a very real possibility since company had no earnings outside of Sinovel business.

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