Zacks Investment Ideas Feature Highlights: Westport Innovations, Clean Energy Fuels, Fuel Systems Solutions and Cummins

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Jun 14, 2011, 09:30 ET

CHICAGO, June 14, 2011 /PRNewswire/ -- Today, Zacks Investment Ideas feature highlights Features: Westport Innovations (Nasdaq: WPRT), Clean Energy Fuels (Nasdaq: CLNE), Fuel Systems Solutions (Nasdaq: FSYS) and Cummins (NYSE: CMI).

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Alternative Energy Wars

When our own Mr. Reitmeister went to Washington DC on Wednesday for the White House's First Personal Finance Online Summit, he reported back on the administration's "economic All Stars" team and their initiatives to attack American challenges. Heather Zichal, Deputy Assistant to the President for Energy and Climate Change, outlined the battle plans for energy security.

Zichal noted that China has overtaken the US in terms of energy consumption and that Obama's goal is to reduce net oil imports by 1/3rd by 2025 with a simple three-pronged approach:

Expand domestic oil and gas production
Encourage smarter consumption
Energize the quest for alternative sources

What Are the Investment Opportunities?

The good news is that we are in a global megatrend for energy that rewards those investors with their fingers on the pulse of oil and gas companies creating earnings momentum. Following Zacks #1 and #2 Rank stocks here for the past two years has been a winning strategy that capitalized on the strong earnings recovery of many E&P and integrated names.

The bad news is that because of our nation's dependence on imported oil from unstable areas of the world, and because $5 a gallon gasoline is a consumer-killer -- not to mention the omni-present environmental concerns -- it is in every American investor's best interest for us to find long-term alternative solutions.

My focus since October has been on the opportunity that could kill two birds, namely, the Natural Gas Act legislation that would provide significant tax and investment incentives to convert America's trucking fleets to run on natural gas engines. Why is this such a big deal?

Because we have an incredible abundance of domestic natural gas. And because it is extraordinarily cheap. And because it has such an extremely low environmental impact compared to oil and gasoline production processes and emissions. Need I go on?

So I looked at lots of trades in natural gas E&P firms, and I also looked at the companies involved in building the engines, conversion kits, and other infrastructure necessary to use compressed natural gas (CNG) and liquefied natural gas (LNG) in trucks and cars safely and efficiently:

Westport Innovations (Nasdaq: WPRT): specializes in building natural gas engines and has joint venture with Cummins (CMI)

Clean Energy Fuels (Nasdaq: CLNE): leading provider of CNG and LNG products for transportation

Fuel Systems Solutions (Nasdaq: FSYS): manufactures products and systems that allow on-highway and off-highway engines to operate on clean burning, gaseous fuels such as propane and natural gas

Political Tipping Point

The problem with investing in these early growth stage companies on the verge of a potentially explosive industry is that it seems everything hinges on Congress "doing the right thing." I put that in quotes because there is a big difference of opinion about what "the right thing" is in Washington.

Initially, I assumed that natural gas economic incentives were a no-brainer for our economy and environment and that the only people standing in the way -- the Nat Gas Act legislation has been pushed to the side at least twice in recent years -- were big oil companies with a vested interest in the status quo. Billionaire T. Boone Pickens seemed like the archetypal, honest, plain-spoken, patriot who just wanted what was best for his country.

But there is another economic angle on this besides the vested interests of political lobbyists on either side. Last month, four Republican lawmakers who had been co-sponsors of the bill that Pickens helped engineer withdrew their support on mostly philosophical grounds. In other words, it's not just crude oil vs. nat gas. It's free market vs. more subsidies and potentially higher taxes for some, if not all.

As Mr. Reitmeister asked Heather Zichal at the White House, "How much does the Administration believe in the free market to help solve our energy dependence issues?" If you had asked me a few weeks ago, I would have said that we need government to be the architect of an energy policy that creates good catalysts and incentives, instead of just letting big oil run the show on de facto incentives that are leading to higher prices, continued foreign dependence, and ecological threats.

But Steve's point was simply that higher prices should be a natural trigger for innovators to create solutions. We experience this phenomena already as triple digit oil spurs investment in tar sands exploration and solar alternatives. And maybe the purest way really is the best way. Goodness knows we don't need any more complicated tax laws or new subsidies for industries in an era when the country has a debt and deficit crisis.

Cummins Wins Either Way

Still, I think that natural economic incentives that would drive the massive process of converting trucking fleets to nat gas won't happen fast enough. Oil might have to go to $150 a barrel to be the "trigger." And that's why I tend to favor government assistance. But, since this is a debate I need to learn more about, I will withhold final judgment and close simply with the best investment idea in this space.

Since all four of the nat gas E&P firms mentioned are Zacks #3 Rank (hold) stocks, not much stands out there. If you own one, you might just as well keep it. Regarding the engine makers and CNG/LNG providers, WPRT and FSYS are both #4 Rank (sell) stocks and should be avoided now, while CLNE is a #3 Rank.

The one company that does stand out is Cummins (NYSE: CMI), a Zacks #1 Ranks (strong buy) name. With strongly profitable conventional engine divisions, it also has exposure to the nat gas engine industry. If something significant happens on the legislative front, CMI will likely capitalize since they are firing on all cylinders anyway. See my article from last week "Industrial Strength Economics: CAT and CMI" for more on their earnings drivers in light of emerging markets demand.

When in doubt, don't risk investment capital just to speculate on future wild cards. Go with the strength of dominant global companies with the earnings momentum to prove it.

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