Call Options Or Put Options On Westport Innovations (WPRT)?
Westport Innovations (WPRT) is the leader in fuel system technologies that enable light, medium, heavy-duty, and high-horsepower petroleum-based fuel engines to use natural gas and alternative fuels.
WPRT currently trades for $23.50 per share. The shares are up 7% from the 52-week low of $21.93. But the stock has tumbled more than 50% from the 52-week high of $50.19.
Is this an opportunity buy call options on WPRT as more heavy trucks switch to natural gas? Or should you buy put options on WPRT after an analyst downgrade?
The bulls make a convincing argument…
It’s no secret the US is sitting on an abundance of natural gas.
In fact, new drilling technologies are enabling oil & gas exploration and production companies to pull more natural gas out of the ground than ever before.
Last year alone, natural gas production surged 7.8% to 24,169,613 million cubic feet. Production is up a whopping 27% from the low point in 2005. And 2012 production is on pace for another record year.
The glut of supply has devastated natural gas prices. Earlier this year, natural gas prices hit their lowest levels in a decade.
Put simply, natural gas is an inexpensive, clean burning, and easy to use energy source. And America has enough to last 100 years.
The trucking industry is one of the first industries to capitalize on America’s new found wealth of natural gas.
Today, many fleets are being outfitted to run on natural gas instead of diesel fuel. And WPRT’s industry leading natural gas fuel systems are the most popular way to outfit new trucks to run on natural gas or convert older diesel power engines to run on natural gas.
It’s an industry wide trend that’s still in the early stages but the potential market for natural gas powered heavy trucks is huge. And WPRT has partnered with all of the major truck manufacturers and engine builders to ensure their technology is most widely used.
WPRT’s in the enviable position of being the industry leader in one of the fastest growing niches of the transportation industry. And the recent decline in the stock price represents an opportunity to grab some quick profits as it rebounds from oversold conditions.
But the bears have a compelling case as well…
Goldman Sachs (GS) laid out the bearish case for WPRT when they initiated coverage of the stock with a sell rating and a $21 price target.
The Goldman analyst conceded the fact that WPRT’s natural gas engines will gain market share. But the stock has limited upside due to its lofty valuation and other industry headwinds.
You see, the usefulness of natural gas as a transportation fuel is limited by one key factor… the lack of refueling stations. Without refueling stations, natural gas just isn’t a practical alternative to diesel that you can get at every gas station in the country.
What’s more, WPRT’s biggest money maker to this point is their joint venture Cummins (CMI). And the current agreement will expire in 2021. If they fail to renew these agreements, they’ll lose a valuable source of revenue.
And last but not least, WPRT isn’t a profitable business. Until they prove they can turn a profit, any investment is speculative at best and more likely a losing bet.
If you think the bulls are right, take a look at buying the WPRT March 2013 $29.00 calls.
If you think the bears are right, take a look at buying the WPRT March 2013 $20.00 puts.
Good Investing,
Corey Williams
Category: Options Trading
