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Rising Star Buy: Solazyme

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This article is part of our Rising Star Portfolio series.

The old saying "Never catch a falling knife" is a common investing adage. However, sometimes you want to catch a fallen growth stock if it's bursting with major potential. That's why I'm buying some more shares of Solazyme (Nasdaq: SZYM  ) for the Rising Star portfolio I'm managing for

The business
As I discussed in my original buy article in July, San Francisco's Solazyme is a biofuels company that's turning cheap, plant-based sugars into affordable oil products using microalgae. One of its key differentiators is its use of "indirect photosynthesis" instead of open-pond methods, basically slashing the time it takes microalgae to produce oil to just a few days, and without the use of sunlight.

Although the big story here is affordable biofuels, Solazyme's products have many uses. Take the Solazyme-based beauty products called Algenist, which are available from Sephora, QVC, The Shopping Channel, and J.C. Penney (through the Sephora shops inside J.C. Penney stores).

Here's another odd use: algal flour. Algae-derived flour can be used in diet foods in lieu of conventional flour; its lipid profile is very similar to olive oil. The scientists at Solazyme have been able to make desserts, dips, a milk substitute, and other foods using the flour, resulting in snacks that contain less fat and fewer calories and provide a good source of protein.

In October, joint venture Solazyme Roquette Nutritionals announced its second-phase manufacturing facility in France; it will be able to expand production of Whole Algalin Flour to 5,000 metric tons in 2012. This joint venture already sells nutritional-supplement ingredients under the name Golden Chlorella.

Solazyme has also recently expanded its relationship with Unilever (NYSE: UL  ) , increasing the companies' R&D efforts; should those efforts yield successful products, Unilever would sign a multiyear supply agreement that would help it execute on its Sustainable Living Plan vow to double its business while halving its environmental impact.

Why I'm buying
This business is highly diversified with great commercial potential, despite its simpler reputation as just another biofuels play. And it hasn't escaped my notice that Solazyme shares have been cut in half since I first bought in. I'm viewing this as a great opportunity to load up on some more. Although Solazyme reported a wider year-over-year quarterly net loss in its recently reported quarter, that wasn't unexpected; this company probably won't be profitable for a while, given its starter status. On the other hand, Solazyme's revenue just about doubled to $8.9 million.

A recent event convinced my Foolish colleague Tim Beyers that Solazyme's the most practical green-energy play right now, and that event has also driven me to buy more Solazyme shares for this portfolio. Several weeks ago, United Continental's (NYSE: UAL  ) United Airlines sent a Boeing jet on an "Eco-skies" test flight, powered by fuel developed by Solazyme and Honeywell (NYSE: HON  ) . This cleaner fuel was composed of 60% petroleum-based jet fuel and a 40% algae-based biofuel blend.

Meanwhile, the U.S. Navy launched its biggest biofuel test last night, using a blend of half petroleum-based fuel, half Solazyme hydro-processed algal fuel to send a destroyer ship from San Diego up the California coast to Port Hueneme. Although the performance results compared with conventional fuel haven't been reported yet, Solazyme's involved in the military's green efforts and could be a beneficiary of the U.S. Navy's drive to create a "Great Green Fleet" by 2016.

Despite the stock's drop, Solazyme's given plenty more reasons for long-term investors to feel hopeful about its future.

And now, the risks
As I said in my initial buy article, Solazyme is a risky stock. Being cutting-edge can cut both ways, folks, and there's no guarantee as to the extent of its success in the wide-scale commercialization of its business.

Solazyme faces plenty of competition in the nascent biofuels space from other recently public entities, including Gevo (Nasdaq: GEVO  ) , Amyris (Nasdaq: AMRS  ) , and KiOR (Nasdaq: KIOR  ) .

Clearly, Solazyme also faces formidable competition from conventional oil producers, and the price -- and affordability -- of oil makes a major difference in how the market will view algae-based biofuel products. If sustainable fuels and oils are perceived as too dear, there's no guarantee that the marketplace will take into account that negative externalities actually make fossil fuels a high price for the world (and future generations) to pay.

Last but not least, Solazyme is, to a certain degree, at the mercy of speculative investors. Given Solazyme's relatively recent IPO status and its early entry into a nascent space, this stock will definitely require some long-term patience as it develops its business.

The Foolish bottom line
Regardless, Solazyme's exciting latest developments and diversified business create a solid thesis for copious future growth. Its cutting-edge, sustainable products also help create a healthier, cleaner world. These factors earn it a second-time spot in my socially responsible Rising Star portfolio.

Alyce Lomax owns no shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of Amyris and Solazyme. Motley Fool newsletter services have recommended buying shares of Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (13)

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 November 17, 2011, at 10:24 PM, clevelandrudge wrote:

    If you really want to hype your 'once in a lifetime opportunity,' here's a little SECRET: hire a professional Writer and do it on your own dime.

  • Report this Comment On November 18, 2011, at 8:26 AM, algaepreneur wrote:

    “We need legislation to allow the Defense Department to enter long-term contracts for fuels to attract investment,” said Billy Glover, Boeing managing director for environmental strategy. “Financiers are looking for a commitment of at least 10 years by a party with a AAA credit rating as a prerequisite for underwriting.”

    Billy Glover needs to be educated - financiers want results, not long-term bs. Financiers will not finance 10 year committments to an insolvent airline industry.

    Heard cost was $400 per gallon. Sold at $430 per gallon. According to S-1. They need third party algae producers. Has anyone measured energy inputs?

  • Report this Comment On November 18, 2011, at 10:32 AM, TopAustrianFool wrote:

    This will be know as the SolaBust of the 2010's. You wait and see...

    All of this alternative energy is nothong but the new bubble built on junk science and govt subsidies.

  • Report this Comment On December 02, 2011, at 1:37 AM, burningdaylight2 wrote:

    ok, so what does a barrel of algae fuel cost?

  • Report this Comment On December 15, 2011, at 2:08 AM, imaham wrote:

    Is this the same company that just sold the Navy their biofuel for 16 bucks a gallon? The same company that has T. J. Glauthier, a member of the Obama presidential transition team on board as a "strategic advisor." The same T.J. Glauthier that was worked on the energy-sector portion of the 2009 stimulus bill?

    You think that Solyndra was a blow up, wait till the press has a chance to get ahold of this. You might want to review the article published on 12/13 on

    I wouldn't touch this one with a 10 foot pole!

  • Report this Comment On December 31, 2011, at 8:57 PM, easyavenue wrote:

    Too speculative for me.

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