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 Rentech (NYSEMKT: RTK) today, and see why you might want to buy, sell, or hold it.
Founded in 1980, based in Los Angeles, and sporting a market capitalization near $660 million, Rentech is involved in synthetic fuel technologies and renewable energy. It has developed biomass gasification technologies that turn biomass and waste into usable gas, and also makes natural-gas-based fertilizers and industrial products.
Its stock has nearly doubled over the past year, leading some to want to jump in and others to wonder whether its big surge is behind it.
The business this company is in is a big draw for many. Alternative energies are growing in popularity, and Rentech's results reflect that. Its earnings are expected to double next year, and it has recently begun flirting with profitability, following years of net losses. Its free cash flow is getting close to moving from the red to the black, too. In its third quarter, revenue soared 56% over year-ago levels, and it surprised many with a net profit.
Management explained : "The strong results we reported this quarter reflect high margins and prices in our nitrogen products manufacturing segment and reduced R&D expenses in our alternative energy segment... To increase shareholder value at Rentech, we are further reducing R&D expenses, moving to commercialize our technologies with partners and invest in energy-related businesses with conventional technologies and good returns, and expanding [majority-owned subsidiary] Rentech Nitrogren Partners L.P. (NYSE: RNF) through growth and acquisitions."
The company is not standing still, either. Rentech Nitrogren recently announced a $158 million acquisition of Agrifos Holdings, which is one of North America's largest producers of ammonium sulfate fertilizer. The deal is promising in many ways, bringing geographic diversity and expanded growth potential. Still, many think that natural gas prices are more likely to rise than fall over the coming years, which can hurt fertilizer makers. Keep in mind that despite Rentech's exciting alternative-energy potential, it's still making most of its money in fertilizer.
One reason to walk away from this stock is that by conventional measures, it doesn't appear to be a screaming bargain -- at least now that it has doubled in value. Its recent price-to-earnings (P/E) ratio is negative, and its price-to-sales and price-to-cash flow numbers are higher than many bargain hunters would want. Remember, of course, that negative numbers sometimes reflect companies spending heavily now in order to generate payoffs later. Other companies are trying to become dominant in bio-fuels, so Rentech needs to keep up. Meanwhile, a glance at the company's income statement history shows operating expenses up significantly lately.
I might suggest that you steer clear of Rentech if you're looking for income from your investments, as the company offers no regular dividend. But like some companies did before the end of 2012, in the face of a likely tax hike on dividends, Rentech announced a special dividend to be paid in December, one that amounted to about a 6.6% yield.
The company has ample cash on hand to last it awhile, but it also has significant long-term debt.
The biggest reason to avoid Rentech is perhaps that despite all its promise, society has not yet embraced biofuels. Meanwhile, as my colleague Travis Hoium pointed out about fellow biofuel company Solazyme (NASDAQ: SZYM), which turns algae into energy, once these fuels become more widely used, demand for their production inputs will rise, driving up prices. Thus, the fuels might become less cost-effective.
Given the reasons to buy or sell Rentech, it's not unreasonable to decide to just hold off on it. You might want to wait for it to post a string of profitable quarters and rising revenue or for its debt levels to fall. You might wait for the stock price to fall, too, to offer a more compelling entry point or for alternative energies to become even more widely accepted.
You might also check out some other interesting fertilizer or alternative-energy companies to see if they seem like better bargains than Rentech. Perhaps take a look at Westport Innovations (NASDAQ:WPRT) or Clean Energy Fuels (NASDAQ:CLNE), both of which are poised to profit from growth in natural gas-powered vehicles. The former is focused on engine technology, while the latter is building out a fueling-station network. Interestingly, both companies need each other in order to succeed. You might also want to tread carefully here, as great potential is paired with some risk, as both companies are not yet posting strings of profits.
You might look at Rentech subsidiary Rentech Nitrogen Partners, too, as the master limited partnership (MLP) sports a 7.4% yield at the moment. Just know that MLPs have some special complications. The company, along with peers such as Terra Nitrogen (NYSE: TNH), has been enjoying a tailwind in the form of low natural gas prices, as natural gas is used in the production of its fertilizer.
I'm holding off on Rentech for now. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.