By most accounts, it's an all-American dream come true. U.S. Geothermal Inc. (NYSEMKT:HTM), working hard - for years - to make something out of nothing can finally see the light at the end of the tunnel. HTM has swung to a profit, and is strong enough now that it's probably going to remain in the black in perpetuity. Shareholders who got into U.S. Geothermal anytime during or after 2012 have finally been handsomely rewarded, with most of that reward materializing in just the past three weeks. Regardless of when an investor got into a position in HTM though, there's just one thing left to do at this point.... get out. Lock in your gain and walk away, at least for a little while.
Say what? Why let go of one of the market's hottest stocks when things have never been better? Because, between the chart and the news and the euphoria surrounding the whole shebang, there's just something a little suspicious about HTM at these levels, and a significant pullback may be nigh.
First and foremost, there's a valuation problem. As it stands right now, U.S. Geothermal Inc. is a $96 million company that did $27.4 million worth of revenue last year. Granted, that's far better than 2012's top line of $9.8 million, and besides, you own a stock for where it's going rather than where it's been. While that's completely true, where HTM is going in 2014 should be revenue of only about $29 million. That translates into a price/sales ratio of 3.3 versus the market norm of about 2.4.
The valuation conundrum is even more alarming when you're talking about profits. While U.S. Geothermal has fought its way into the black, 2014's projected net income for this year is only $5.5 million at the high end. That translates into a best-case scenario forward-looking P/E of 17.4, which is palatable, though not exactly cheap. And remember, that's the high-end estimate. The low-end is a projected profit of $2.5 million, which translates into a forward-looking P/E of 38.4 for HTM.
This is likely the point where fans and supporters of the company will counter with the notion that one can't value a budding growth story the way more established and older companies are valued. This reporter couldn't agree more. Indeed, this reporter thinks U.S. Geothermal Inc. is one of the most compelling stories out there for 2014 and 2015. Thing is, this reporter has also seen hundreds of stocks get well ahead of themselves relative to earnings, and though in the long run corporate results and the stock's price find an equitable equilibrium, in the short run, investors tend to not want to wait it out. Instead, traders realize it could be a couple of years before the stock's current price can be justified, and decide not to wait it out, dumping their shares looking for the next big hit. HTM isn't immune to that hot/cold pattern rooted in the fact that the market is amazingly fickle.
That being said, the chart is already in the midst of the process of hitting a top and pivoting lower.
The first clue to that end is today's volume. Although the volume so far isn't anything remarkable (we saw greater volume on the 13th and 24th), we're also only about an hour into today's session as of the time of this writing, and we're already to the halfway point of the volume we saw those two days. So, barring the market closing early, we WILL see a volume spike today, which tend to materialize at pivot points. They're the proverbial last hurrah for rallies and pullbacks, suggesting the last of any would-be buyers are rushing in. Past this point, there aren't apt to be any buyers left... only sellers. The fact that HTM opened near its high today and has spent the better part of the session so far selling off - and is currently right at its low for the day - further suggests that the crowd has become one of profit-takers rather than buyers. Once that ball gets rolling, it's tough to stop.
The other clue that says we're headed for a deeper pullback from U.S. Geothermal is a little more blatant - it's overbought, and the market doesn't let things stay overbought very long.
Don't misunderstand. U.S. Geothermal Inc. is a great company, and HTM will rebound from whatever setback it suffers over the course of the next few days. There's no need for current shareholders to suffer as well, however. Anybody who locks in their gain today can still buy it back later, at what should be a considerably better price.
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