The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment.and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn.and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
American Superconductor
Westborough, Mass.
$10.42
52-week low-high: $9.01-$15.13
$336.7 million market cap
By W.D. Crotty
American Superconductor is a small-cap company that is commercializing superconducting. It is already the world's principle vendor of high temperature superconducting (HTS) wire and large rotating superconducting machinery, and the world-leading supplier of dynamic reactive power grid stabilization products. General Electric
Since IBM
The new generation of HTS wire will bring a wave of new products. Ultra-compact ship motors that offer high fuel efficiency and lower maintenance costs -- at a cost equivalent to conventional motors of the same power and torque rating. Also coming are industrial motors (a $1.2 billion market) that will offer an attractive alternative to conventional motors by virtue of their lower acquisition cost and their reduced ongoing (operating) cost.
The focus of this tournament is three years. By that time, the opportunity at American Superconductor will be clear, and the stock could be many times higher than it is today.
So, do you want American Superconductor, a company with products based on a disruptive technology -- where sales increased 144% in the latest quarter and profitability is on the horizon? Or do you want PetroKazakhstan, with legal problems and the potential for expanding excess profit taxes (see Note 16) -- and a low earnings multiple that reflects these risks?
Fool contributor W.D. Crotty does not own stock in the companies mentioned.
PetroKazakhstan
Calgary
, Canada
$36.09
52-week low-high: $24.79-$46.92
$3 billion market cap
By Bill Mann (TMF Otter)
Like any good coach, I need to make sure that I set up my team to compete best with the competition. For Round 1, PetroKazakhstan had a grueling battle with a monster company in Total
This time around we're up against another small fry, this time one that has a market cap one-tenth the size of PetroKazakhstan. We must adjust accordingly.
I am at a disadvantage, knowing exactly nothing about the superconductor business, so any comments I make about it are going to be from a position of ignorance. Let's play to the strength of PetroKazakhstan first. It is a linchpin company in a developing economy. It has Canadian management, with a CEO whose interests are deeply aligned with those of shareholders. It is extremely profitable, yet its best days are ahead of it. You see, it is difficult and expensive to get oil out of Kazakhstan at this point. But if you strain your ears you can hear the sounds of clanking, since the pipeline that will connect Kazakhstan to China -- the fastest growing oil consumption market in the world -- is under construction.
Oil. This is a story about oil. For all the promises that Saudi Arabia has made about ramping up production, my own analysis says that they've not done so because they have hit a ceiling. This means, simply, that incremental sources like Kazakhstan should largely be absorbed into the market without affecting prices overall.
Ah, but oil prices are collapsing, right? That's the news today. Well, as I've said on several occasions in the past, there's no such thing as a single price of oil. What's most widely quoted as the price of oil is a one-month forward contract on a single grade of crude, usually West Texas Intermediate. But if you look at contracts that go out as much as seven years, you'll see something amazing: They all price at or above $50. These tend to trade at a discount to the one-month forward, so the fact that they do not says that we really, truly may have seen the last of cheap oil for a long, long time. This means the oil companies, PetroKazakhstan included, are just going to have to roll up their sleeves and figure out what to do with the billions that are going to keep rolling their way.
And PetroKazakhstan is cheap, at 11 times enterprise value.
As for superconductors, let me make a Lynchian observation. They may have a substantially bright future, and American Superconductor may be at the vanguard. But I don't understand the business, and I venture that 99% of all investors have scant ability to analyze these companies' competitive position or potential either. Oil prices are up. Simple. They look to stay up for a long, long time. Even simpler. I would be able to fit everything I know about superconductors and the companies that specialize in them onto a very small piece of paper. I suspect that most investors are in the same boat.
So what's the bigger risk: buying a currently profitable company producing the most basic building block of commerce, or buying a promising, but unprofitable company that makes products that require a PhD to discuss with even a modicum of intelligence?
Bill Mann owns shares of PetroKazakhstan.
Rebuttals
One mission of The Motley Fool is to educate. Instead of saying that you do not understand superconductivity, why not take a minute to let Progress Energy
Let's see.low earnings multiple versus no earnings multiple. I can't make up my mind which way to go.
Yes, American Semiconductor could be many times higher than it is today. It might also need to continue issuing shares to fund operations that have never generated positive free cash flow. You can keep your "may," attractive as it might be. Leave me with "is," as in PetroKazakhstan is profitable, is paying a dividend, and is buying back shares. -- B.M.
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