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Buy, Sell, or Hold: Westport Innovations

Selena Maranjian
August 6, 2012

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons and decide whether it's possible upside outweighs its risks. Let's take a look at Westport Innovations (Nasdaq: WPRT  ) today and see why you might want to buy, sell, or hold it.

Headquartered in Vancouver, Canada, and having a market capitalization around $2 billion, Westport Innovations is a smallish company operating in a promising arena: It designs low-emissions engines (and related systems and components) that run on natural gas and other alternative fuels, often by converting diesel engines. These engines can be found in urban buses, tractors, heavy-duty trucks, garbage trucks, and other vehicles. Its stock is up 67% over the past year.

That company description alone should give you some sense of why you might want to buy into Westport. There's great interest in alternative energy, especially as the price of oil has soared in recent years. The low price of natural gas, meanwhile, has spurred interest in technologies that use it.

Westport's success is attractive, too. Its five-year average annual revenue growth rate tops 30%. In its recently reported second quarter, revenue surged 136% above year-ago levels, while the net loss shrank by 66%.

The company has been signing deals and partnering with some significant players in the vehicle and engine world, including Ford, General Motors, Caterpillar (NYSE: CAT  ) , and Cummins (NYSE: CMI  ) . With Caterpillar, it will develop natural-gas technology for off-road equipment, while its General Motors partnership will focus on light-duty vehicles. With Cummins the company has long had a partnership, dubbed Cummins Westport, where Cummins builds engines that Westport designs. This business has done well: Westport reported that Cummins Westport's revenue in the second quarter was up 78% over last year.

Finally, note that the company's stock has been rather heavily shorted, meaning that many investors are betting against it. This can actually be a good thing for Westport, if it ends up succeeding, as these shorts would eventually decide to cut their losses and cover their positions, buying shares and thereby driving the stock price up further -- via a "short squeeze."

A significant strike against the company is the fact that it's not yet turning a profit. Its cash from operations has been negative (and declining) over the past few years. Net income is also negative.

Then there's competition. There are some concerns about Cummins, which has announced plans to do some designing of natural-gas engines on its own. Meanwhile, truck maker Navistar (NYSE: NAV  ) has partnered with natural-gas specialist Clean Energy Fuels (Nasdaq: CLNE