Editor's note: A previous version of this article did not properly clarify Tesla's profitability. Tesla recorded a non-GAAP profit in 2013. The Fool regrets the error.
We at The Motley Fool believe in discovering solid companies with strong business models and investing in them for the long haul. Yet it's hard not to notice when a stock shoots up, seemingly out of nowhere, much like Plug Power ( PLUG -8.13% ) has done in the past year. The alternative energy stock has gained as much as 912% in the last six months and more than 2,885% over the past year. Taken at face value, it can be tempting to want to jump in and ride the rally. I mean, who doesn't want to lock in gains like that?
But a closer look at Plug Power and its volatile history reveals the hidden pitfalls of investing in speculative stocks such as this. Here's why putting your money into Plug Power is a dangerous game.
Speculation at its best
Don't get me wrong, I'm all about momentum stocks when the risk-reward balance is right. After all, I've owned shares of Tesla Motors ( TSLA -6.42% ) since 2011 when the electric carmaker was the most shorted stock on the Nasdaq. Tesla, which also plays in the alternative-energy space, has enjoyed a nice run since then with the stock up more than 553% in the past year. But unlike Tesla, which has proven it can deliver investors profits, with a non-GAAP profit this past year, Plug Power has been in the red for the past 16 years.
Another worrisome trend is the volume at which Plug Power's stock is trading hands. "Over the past 10 days, average volume has risen to an average of 129 million shares a day, well above the float of 88 million shares. On two separate days last week, every share of Plug Power available in the market was traded an average of three times a day," according to a report from Fortune. But that's just the tip of this iceberg.
A separate report from Citron Research calls Plug Power a "casino stock": "[T]he recent volume and share price surge in Plug Power demonstrates how Wall Street treats this stock: nothing more than a casino." Citron accurately points to Plug Power's history of over promising and under delivering. In spite of that, it's important to keep in mind that Citron Research is a company that's made money in the past by shorting the very stocks it publicly trashes in its reporting.
Could this be history repeated?
Citron Research aside, there are still plenty of red flags when it comes to Plug Power's long-term prospects. Wal-Mart's decision to purchased more than 1,700 GenDrive fuel cells from the company fueled the momentum in shares of Plug Power this month. But a single contract with a major retailer hardly justifies the stock's 60% gain during the past month.
With the stock now trading near $6 a share, much of the future growth is already priced in. As fellow Fool Travis Hoium explains, Plug Power "would need to take in 10 orders the size of Wal-Mart's just to come close to living up to its current valuation and that's a tall order." Importantly, this isn't the first time mega speculation has rocketed Plug Power into space. The company's stock price surged to $1,500 in early 2000, only to come crashing back to earth last year when it touched a low of $0.13 per share, according to Fortune.
Critics now argue that the stock could be headed for a similar pullback in 2014. There's no doubt that the promise of alternative energy, particularly fuel cells, is an exciting market today. But the key is finding companies with a well-balanced approach to risk and reward. At this point, I'd like to see Plug Power land some more Wal-Mart sized contracts before I'd even consider jumping in.