I Love Headwaters

Maybe it's because I live in Minnesota, home of the headwaters of the mighty Mississippi River, that I am so smitten with Headwaters (NYSE: HW  ) . The river starts out small but quickly gains in size, and Headwaters has done the same. In 1999, the company had only $7 million in annual revenue; by 2005, that figure had swollen to more than $1 billion.

Like the Mississippi, which gathers strength from alternative sources such as the Ohio, Missouri, and Arkansas rivers, I believe Headwaters will also begin tapping into some nice revenue flows from different sources and gathering similar strength.

Over the past few years, company management has done an excellent job of diversifying itself away from its synfuel business, which has traditionally provided the bulk of its revenues.

Its constructional materials business now accounts for 45% of its revenues. As I explained in this piece last week, I don't think that portion of its business will slow down anytime soon, as the environmental benefits of its products come to be better understood by the market. And even if there is a slowdown, Headwaters, which sports a very down-to-earth P/E ratio of a shade more than 11, should be able to remain competitive with the other large cement firms such as Cemex (NYSE: CX  ) and Lafarge (NYSE: LR  ) .

I also like Headwaters as an alternative energy play. Later this quarter, the company is expected to bring an ethanol plant online in partnership with Great River Energy. Ethanol is a risky play that has taken its toll on companies such as Archer Daniels Midland (NYSE: ADM  ) and MGP Ingredients (Nasdaq: MGPI  ) since last summer, but Headwaters has a slight advantage over these producers because its plant doesn't rely on natural gas. Instead, it uses excess heat generated from a neighboring coal-burning facility. This nifty little trick should allow Headwaters to maintain a leg up on those other ethanol producers.

The real reason I am attracted to Headwaters, however, is because of its involvement with nanotechnology. Like a small tributary flowing into a big river, this emerging "science of the small" isn't yet contributing much in the way of revenue to the company, but I suspect this will soon change.

According to company officials, a couple of major oil refineries are investigating its proprietary nanocatalysts to help them convert heavy bottom-of-the-barrel oil into lighter and more valuable crude. If the technology is successful, it will keep revenues and profits flowing for a good long time.

What's sending Fools' hearts aflutter? Go back to our intro page to see what else we have a crush on.

Fool contributor Jack Uldrich owns stock in Headwaters, which is a Motley Fool Rule Breakers recommendation. Cemex is a Stock Advisor pick. The Fool's disclosure policy wants to be your Valentine.

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10/21/2016 12:44 PM
HW $17.03 Up +0.04 +0.24%
Headwaters CAPS Rating: **
ADM $42.10 Down -0.08 -0.19%
Archer Daniels Mid… CAPS Rating: ***
CX $9.26 Up +0.25 +2.77%
Cemex CAPS Rating: ***
MGPI $37.09 Down -2.75 -6.90%
MGP Ingredients CAPS Rating: **