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Is the best time to invest in a panic? AMSC

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June 03, 2011 – Comments (2) | RELATED TICKERS: AMSC

The more bullish members of CAPS, who did not fear that the end of the world was really at hand in 2009 (as we were all still calming grocery shopping, driving around, and most of us still working) took the worst moments of panic and if they had money - they kept buying.

It is the hardest to buy into a stock when it seems like everything possible is going wrong and hitting at the same time.  But, usually this is the time when people are selling the stock based on emotions and over-protective responses, rather than on valuations of a company or its future.

A current example of this, I believe, is American Superconductor or AMSC.

This company has long struggled with its core superconductor business to earn profits.  About 6 years ago, it started developing a second niche in selling parts for wind turbines.  The rise of demand for wind power in China led to growing profits and positive cash flow.  After all this, the company was poised to expand further into wind power and had 0 debt with lots of cash on hand.  By the late 2010, this company had a high PE of ~60 on continued belief that their wind turbine sector could keep growing at high rates.  

Citron Research, among others, was concerned however.  Because most of the revenues were now coming from a single customer in China named Sinovel.  If something happened to that one account, the consequences could be dramatic.  And in early 2011, this came to pass.  Sinovel "suddenly" stopped taking shipments of parts (that had been physically delivered to their factory).  I am sure there was more happening behind the scenes here, probably Sinovel understood their importance as an account and was trying to force renogociations on price or something - and strongarmed AMSC.  Technically, this appears to be a breaking of a contract, but because of the murky legal world of China, there doesn't appear to be a legal recourse.  

Following this, AMSC was near crushed, and lost almost 50% of the share price.  More recently, AMSC has delayed filing of their annual 10K report and said earnings from 2010 will have to be restated as it appears that Sinovel is refusing to pay for parts already delivered.  This has lead to a fall now to a share price below $8/share (PE ~10).  It is a terrible story for AMSC, and how much of this situation is AMSC's fault will still yet be understood.  

So that is the situation.  However, I bought shares at $14/share, and I picked up more at $8/share. I am holding back more capital, if further price falls occur to build a larger position.  In a worst case scenario, I could see it fall as low as $4-5/share.  (At that point, the stock would be trading near a valuation equal to cash on hand, which would be crazy.)  Right now, the assets and cash on hand are worth more than the valuation of $400 million market capitalization.

The company might hobble along for a while because of Sinovel, but on the bright side:

1) No debt, lots of cash can help it make it through a dark period.

2) The superconductor business is finally developing.  AMSC is now building power transmission systems in the US and Korea.  The technology has finally reached useful level.

3) The "Tres Amigas" superstation project in the United States would lead to the development of superconducting switching stations between power grids.  AMSC would be utilized here.

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The wind sector is definitely important in the short term.  I am sure AMSC would prefer to find ways to diversify from Sinovel, but I am also sure they would like to find a workable agreement with Sinovel to keep that customer.  In the short term, the uncertainties have made AMSC a very cheap stock, increasingly priced as if the company was facing extinction.  I don't think there is much chance of that event, though conditions could be hobbled for a while.  I am feeling about AMSC much like I did about MTW back in the 2009 period, so I'm slowly building a position now.

 -Rof 

2 Comments – Post Your Own

#1) On June 03, 2011 at 10:01 AM, L0RDZ (86.81) wrote:

Aren't they too small market cap wise ?

300 million market cap ?

At least your honest in telling us your stock buy ins....   the stock  is  dippin just like everything else...

maybe its not time to buy yet..  but until  the dust settles and  you'll know who is still left standing..

If they are standing maybe  only buy more when the stock stops  going down and starts going back up..

Dollar cost avg on the down is rough.... from exp...

best to dollar cost on the up..

LORDZ

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#2) On June 04, 2011 at 11:25 PM, TruffelPig (< 20) wrote:

One should not buy bad companies really. This one seems bad. It could go broke. The relationship with Sinovel has to be clarified - since Citron reported on it, it hasn't. What is going on with AMSC and Sinovel is - to say the least - bizarre. I do not buy what is sold to the public. 

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