Almost exactly two years ago, I wrote an article entitled: "Sell These 3 Stocks and You'll Kiss Your Retirement Goodbye." It garnered a lot of positive attention, and I had to pat myself on the pack for doing such a good job.
The only problem: I shouldn't have been measuring the quality of the article by the "Rec" count, but how well things played out over the coming years. MAKO Surgical, the first company, was taken private and underperformed the market by 55 percentage points when it was publicly traded. Chinese search engine Baidu is losing to the market by about 13 percentage points.
And the final company, Westport Innovations (NASDAQ:WPRT) -- designer of natural gas engines -- has performed the worst, losing to the market by a whopping 95 percentage points.
The time has definitely come to ask the obvious question: is it time to sell Westport?
Every year, around springtime, I reevaluate all of my family's stock holdings. I find that once a year is a good interval to revisit my investing thesis, without doing it so often that I obsess over minutiae and lose track of the bigger picture.
Since I'm loath to sell stocks, I ask myself what the biggest threats to my holdings are, and if I'm comfortable with those threats. Let's take a look at Westport's biggest threats moving forward, and what I think about them.
Will natural gas really be a driver for the future?
Two years ago, natural gas was ridiculously cheap. An overabundance of the resource being fracked out of North American soil led to a vast oversupply. Any stocks that benefited from cheap natural gas were ballooning, and it was a foregone conclusion that natural gas would be powering many of tomorrow's machines and automobiles.
But things don't always play out as planned. Simply put, there are other cheap and alternative energy sources. For instance, Elon Musk, CEO of Tesla Motors (NASDAQ:TSLA), thinks that in 20 years, over half of all new cars will be electric. We might laugh at that now, but its important to remember that few gave Musk the benefit of the doubt when he started Tesla, and things have definitely worked out for him so far.
Though natural gas per se could play a crucial role in generating the electricity these cars will use, Westport's technology would become obsolete. Musk's plan to build a battery Gigafactory that could both make lithium-ion batteries less expensive and provide a source for renewable energy to be stored poses even more problems for Westport should that technology spill over into the markets Westport serves.
My take: Over a long enough time frame, this is a serious threat.
I like technologies that go hand in hand with building a more sustainable future. I think investors -- and the world in general -- do as well. Westport, though it offers a cleaner solution than petroleum-based engines, isn't really about sustainability.
Though more vehicles have switched over to natural gas over the past five years, I think over the long-term the emergence of renewable and electric vehicles could usurp this growth.
Competition is coming from just about everywhere
Tesla might be a great example of possible disruption, but right now, it's only focused on luxury cars, and Westport doesn't compete there.
Fuel-cell technology, on the other hand, does compete for some of the same customers as Westport -- and recently, it's been gaining traction.
Fuel Cell Energy (NASDAQ:FCEL) just announced a deal whereby NRG Energy -- the nation's largest independent power supplier -- would start marketing Fuel Cell's products to their larger customers. And Plug Power (NASDAQ:PLUG) announced key contracts or expansions to provide energy for both FedEx and Wal-Mart.
I'm not saying you should go out and buy Fuel Cell or Plug Power either. Both are very volatile stocks with uncertain futures. But there's no doubt the potential exists for this technology to eat away at Westport's business if and when it spills over into areas where Westport competes.
Power Solutions International (NASDAQ:PSIX), on the other hand, represents a more direct threat. The company's core businesses overlap quite a bit with Westport's, including its focus on industrial, heavy-duty, and on-highway engines that are fuel-flexible. Unlike Westport, however, Power Solutions is profitable, and has been since going public in 2011.
But probably the greatest threat comes from the original equipment manufacturers that Westport currently relies on for manufacturing capabilities. Though Westport has the intellectual property right now, OEMs are incentivized to build their own natural gas engines in the future, cutting Westport out entirely.
My take: this is enough to convince me that Westport isn't a good stock for my family's portfolio.
Taken as a whole, Westport could easily have a bright future, and shareholders may be richly rewarded. But for me, I'm no longer confident owning a piece of this business.
While I'm very excited about alternative energies and their potential, I need to acknowledge that I don't have any insight which would lead me to believe Westport's technology is superior to all the others which will likely be available over the coming years. An industry expert might have that knowledge, but I'm not that person. And that alone is enough to convince me it's time to move on.
A better way to play natural gas
There's no doubt that our abundance of cheap natural gas will change things moving forward. But as you see with Westport, predicting the future is very difficult.
That's why the Motley Fool is offering YOU a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.
Brian Stoffel owns shares of Baidu and Westport Innovations. The Motley Fool recommends Baidu, FedEx, Tesla Motors, and Westport Innovations. The Motley Fool owns shares of Baidu, Tesla Motors, and Westport Innovations. 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.