This ad is particularly ridiculous.
Just wanted to get that off my chest — I know that I look at absurd, hype-filled ads every day, and that I should be getting jaded by now… but this one stands out as more absurd than most.
But, of course, I’m primarily here to give you answers and explanation — so let’s get to it. What is the “$2 Microcap” that Kent Moors is teasing us about in his effort to lure subscribers into his $3,500 Micro Energy Trader?
Here’s a little summary of his pitch from the order form, to give you the flavor:
“I’ve been waiting four years for the right moment to recommend this stock to you (and it’s TODAY).
“As energy’s ultimate insider, I’ve been watching this firm like a hawk since 2011…
“Waiting for the right moment to recommend it to my Micro Energy Trader readers.
“And right now – in addition to its incredibly lucrative deals with the Pentagon…
“The firm I’m talking about also has millions’ worth of supply deals and partnerships in place with a stunning list of household-name companies.
“And with every passing day…
“They’re bringing larger and larger quantities of their ‘polymorphic oil’ to the consumer market through these deals and partnerships.”
Sounds compelling, right?
Let’s go in and check the specific clues so we can find the stock for you — that way, you can do your own research and think for yourself… then, if you feel like it, you can send your $3,500 to Kent Moors if you like. Or to me, if you prefer. Or maybe you could just take a nice vacation, or actually buy the stock with that money if it seems compelling to you… your call.
Some of the clues that we can toss into the Thinkolator as we seek our answer:
“The key to this opportunity is a world-changing new liquid that’s being pumped into a procession of unmarked tanker trucks right now…
“Even as you read this, these trucks are rolling out of a small American company’s nondescript – yet highly secure – production facility in the Midwest.
“Why all the secrecy and security?
“I’ll explain that fully in just a moment. But the crux of it is that this tiny company has pioneered an incredible new ‘polymorphic’ substance…
“And that substance is about to transform dozens of global industries worth at least $3.1 trillion per year….
“This firm will soon be a household name, with a sky-high share price to match.
“That’s because what’s going into those Plain Jane trucks today…
“Will be in virtually everything you rely on for day-to-day living tomorrow.
“The clothing on your back and the carpet under your feet.
“The soaps and cosmetics in your bathroom, and the detergents under your sink.
“The lubricants, paints, solvents, and chemicals in your garage – and the plastics you see everywhere around you.
“Even the foods you eat will soon contain the incredible substance I’m talking about.”
OK, so it’s a company making some kind of oil — used to make biofuels and as a food and cosmetics ingredient and feedstock for chemicals. That means we’ve probably got our answer already, but let’s check some of the specific clues just to make sure.
First, the ridiculous gains promised:
“I’m talking about the chance to score up to 10,000% returns or more over just the next few years…
“Plus multiple triple-digit wins of up to 542% in the coming months…”
Then, after he spends a few pages reminding us that he’s the foremost expert on energy, with every CEO and scientist and key energy person in his Rolodex, we get some more clues…
“The Pentagon is handing you this win on a silver platter….
“The revolutionary new substance I’ve been telling you about is also going to change the liquid fuels game forever (I’ll show you how in a second).
“That’s why the DoD has quietly purchased $510 million worth of marine and aviation fuels derived from this new technology for testing and evaluation.
“Now, to put this in perspective for you – right now, at this ground-floor stage…
“That $510 million deal alone is more than twice the size of the micro-cap company pioneering this breakthrough.
“And if I’m right, this firm will land hundreds of billions of dollars’ worth of military contracts in the future….
“This firm’s high-tech “super-fuel” blends have aced the military’s rigorous testing with flying colors so far.
“Not only do they meet the DoD’s “drop in” specs for HRD-76 and HRJ-5 marine and aviation fuels…
“But they run far cleaner than the conventional fuels currently in use.
“As if that weren’t enough…
“This company’s fuels recently set the Navy speed record for a surface ship – a top speed of 50 knots.
“That’s over 57 miles per hour for a full-sized warship!”
Ugh. So this is why the ad makes me extra-grouchy… it’s the idea that this company somehow won $510 million in business from the Pentagon, did so “recently,” and also “recently” set the Navy speed record.
Because the $510 million investment is the joint investment of several agencies into helping to spur a biofuels market, and it was announced in 2011 and designed to be a three year commitment… though it wasn’t embraced very thoroughly by the military when defense cuts hit the budget shortly afterward. And it wasn’t a $510 million award to one company, not even close — it was designed to spur private investment, with contracts up for bid to lots of different companies with different technologies and strategies. The company being teased here did indeed receive substantial military funding including $10 million to help set up refineries in 2010, and $12 million to supply fuel for an alternative fuel exercise in 2011, but the total revenue for the company being teased here over the last four years is only about $180 million.
And it did help fuel that record-setting naval ship, but that was also not “recently” and wasn’t nearly as impressive as the hype would have you believe. It was for an amphibious landing craft, and it set a speed record for a naval ship using alternative fuels. Those ships are designed to travel with a full load at 40+ knots (full load meaning a tank and a bunch of troops, apparently), and from what I read they can generally hit speeds of 70 knots without a load. And it’s a high-speed amphibious landing craft, not what most folks would call a “full-sized warship” … big Navy destroyers can be very fast, but more like 30-40 knots fast at the very top end. The test was designed to make sure that the fuel is not inferior, and I suppose it did that.
So what is the company that Kent Moors has been watching since 2011? He’s teasing Solazyme (SZYM), the company that makes oil from algae… and they haven’t had a good show as a public company so far, they hit their all-time highs not long after they IPO’d in 2011 and the stock is now down about 90% from those levels. It’s now a tiny little company, with a market cap just below $200 million, and they’ve never come close to making money… but they are still pushing forward with commercializing their algae-derived oils, and they have had some minor success in terms of getting producers to use their products and in developing their own high-end cosmetics using these specialized oils.
The claim to fame for Solazyme, as I understand it, is that they use genetically engineered microalgae to turn feedstocks into oil very quickly, and that they can engineer very precise high-quality oils for high-value end customers. The original headline promise was for this algae-derived oil as a transportation fuel, but without truly dramatic subsidies that’s likely never going to be feasible, at least not in the next five or ten years without technological or other breakthroughs, so last year the company really committed to a switch in strategy to focus much more on food additives, cosmetics, and high-specification oils. That means they can sell their oils for much higher prices, but it also means they have to create consumer demand and convince major consumer product and industrial companies to test their products and use them as an ingredient, and it means they also have to be either dramatically higher quality or deserving of a price premium, or they have to be price-competitive versus various other oils (vegetable, petroleum, whatever)… maybe both, since they’re so new and — compared to existing vegetable oils and the like — so untested and unknown.
The stock has been teased at least once a year or so by a variety of different newsletters, and you can see why it’s a great story — the military biofuels stuff is kind of cool, and there was real R&D funding for that and may be again in the future (though I wouldn’t count on it, the strategic imperative was “reduce reliance on foreign oil” but booming US oil production and low prices have dampened that imperative), and the end markets for their cosmetics and food additives and specialized oils are potentially huge, everything from cooking oil to drilling lubricants that can be made better, more robust, cleaner, and without fossil fuels… but though the story is pretty compelling, the business has been anything but. They have been beset by the costs and delays of their complicated projects, including their ambitious joint venture refinery in Moema, Brazil that’s taken years to get built and running and is still having significant challenges, and they’ve almost run out of that easy early funding from the IPO and research grants and there’s not much indication (to me, at least) that the company is ready to stand on its own as a commercial venture.
The question, really, is whether Kent Moors the self-proclaimed “ultimate energy insider” is right about Solazyme finally becoming a good investment, after so many years of disappointments and delays — either because the company has advanced to the point of commercial production and can start to fund its own operations, or just because it’s now so much cheaper than it was in past years and might eventually become a good business.
Are they really going to hit commercial scale soon, and begin to think about making a profit?
There’s no evidence of that in the numbers yet (they have consistently had expenses that are 2-3X their revenues over the past four years), but past results don’t necessarily tell us whether they’re on the cusp of something better. And analysts aren’t much help, since there are only a few analysts making forecasts and they’re all over the map (and they’re probably trying to get a piece of the capital raising that SZYM will probably need within the next year or so, too) — but even though analysts, on average, think revenues will climb by 150% next year, they still expect the company to lose $1.10 per share in 2016. That’s better than last year, and probably better than this year will turn out, but that’s still a lot of money for a company whose shares trade right around $2 (and which has already had “losses” of more than $6 a share over its 4+ years as a public company).
The company has indicated that they expect revenue to rise substantially in the second half of 2015 and into next year, but from their results so far they’re probably going to fall short of their own forecasts for the rest of 2015 — particularly if their cosmetics line, Algenist, doesn’t resume rapid growth from here (indications are that growth might be slowing down for that product line, which is the only profitable product and brand Solazyme has so far).
They have two major refineries for producing their algae oils, both of which are nowhere near being profitable operations — the Clinton plant in Iowa, and the Moema plant in Brazil. They have a few different branded products they’re trying to build, including Algenist and AlgaPur in cosmetics (Algenist is their brand, they sell AlgaPur as an ingredient that’s being tried by BASF, Natura and Unilever) but also a culinary vegetable oil replacement called Algawise (higher smoke point, lower saturated fat than canola or olive oil) protein/fat replacement powders that are branded AlgaVia, a biodiesel called Soladiesel, a drilling lubricant called Encapso. Some of these are actually commercial, as in things that are being bought by customers as ingredients for products that are actively being produced for sale, but those sales are still quite tiny compared to the size of Solazyme’s investment and in most cases, with the possible exception of Algenist, they aren’t really mainstream… I think it’s probably fair to call many of these test or pilot projects, and in many cases — like Soladiesel — they’re competing with other “alternative” fuels from much larger and more established producers (biodiesel, in that case, which can apparently be made much more cheaply and quickly from vegetable oil than from algae so far).
So I have a hard time seeing it, frankly — I appreciate that these algae oils could theoretically work as a major feedstock, once many, many more large refineries are built and optimized (they have two now, both joint ventures, and neither can come close to paying for itself yet), but that requires both many more years of R&D and expansion investment and — unless there’s some commercial breakthrough where consumers demand AlgaVia and pay huge premiums to get AlgaVia products — a major societal push to create oil from non-petroleum and non-canola sources. This will probably require subsidies either by customers or by the government for a very long time (or, as we’ve seen over the last few years, hundreds of millions of dollars of investment by SZYM and their competitors), particularly where they compete with the dramatically larger and more efficient fossil fuels industry. Even with oil at $100, few were clamoring for Solazyme’s biodiesel… with oil at $40, someone who doesn’t care about profits (like the government) would have to push to get biodiesel’s share of the market to grow.
Of course, Solazyme realizes this — that’s why they’re shying away from biodiesel, effectively just staying involved as a way to put a pin in a future possible product line… and it doesn’t help that they’re even seeing that their high-end lubricant products, like Encapso, require high oil prices (meaning, lots more drilling activity) to thrive. Their strategy shift means that they have become ever more dependent on commercializing their higher-end cosmetics and food ingredients, and while the scale of production should be jumping pretty substantially over the next year or so it remains to be seen whether anyone can guess at when those products become profitable enough to offset the high cost of convincing customers to use their products, let alone the actual production costs and continued R&D investments.
Four years after going public, this is still a start-up trying to revolutionize several industries — it looks to me like it’s going to take several more years of patience. And I don’t have Kent Moors’ contacts and have only looked at the stock for a couple hours this afternoon, but I don’t see any sign at all of big military contracts boosting them anytime soon or of a renewed alternative energy push from the Pentagon — even if they were going to get additional biofuels funding, you’d think the military wouldn’t go out of their way to fund Solazyme’s major capital sponge, the Moema joint venture with Bunge, because that’s a foreign venture in Brazil and that kind of makes the “domestic energy security” talk sound silly.
It’s arguably a bit unfair to apply conventional financial metrics to an industrial biotech startup like this, but it is at least positive that the shares now trade at 3X sales instead of the 16X sales you would have paid a couple years ago when the Motley Fool was teasing the stock at about $15, or 9X sales last year when Jimmy Mengel touted it at $7 as the “God Complex” company.
Compared to those two, $2.25 looks pretty good — and they have plenty of cash to get through the next five or six quarters at their current burn rate — but the stock has traded fairly close to the current price for most of the past year (since the November 2014 collapse), and most of the rational-sounding analysts seem to be emphasizing the need for patience (there are some interesting recent free articles from the Fool on SZYM here and here to give some perspective, and there’s a nice, positive non-investing article about the company here). I wouldn’t go in with the expectation of good news or profits anytime real soon… but then again, I’m not an advisor to oil sheikhs and I don’t hobnob with heads of state.
It’s also possible, given the huge predictions from Moors for short-term gains, that he’s recommending something other than buying just the straight equity in Solazyme — SZYM does have options trading, so you could perhaps get a bit more leverage by selling puts or buying calls if you think the stock is going to do well over the next six months or so, or trading around a position… though most of the contracts don’t seem to trade in enough volume to absorb the action provided by a newsletter recommendation.
For his predictions that you could see gains of 10,000%, I assume he’s just extrapolating something far out into the future, when Solazyme might conceivably grow to become a major supplier. I suppose that’s theoretically possible, even if my lack of imagination means I don’t find it exceedingly plausible — by way of comparison, Archer Daniels Midland (ADM), which we now think of as a long-standing and indispensable giant in the ingredients industry, took 35 years or so show 10,000% gains in its stock price… and at the beginning of that spurt, in the early 1970s, they were already quite profitable and had annual revenues of about $7 billion (inflation adjusted).
Of course, what Kent Moors and I think doesn’t matter all that much — it’s your money, after all, not his or mine. All I can tell you is that his teased “Polymorphic Oil” stock is Solazyme… the rest is up to you. So what do you think, ready to bet on the microalgae oil future with Solazyme… or not so interested? Let us know with a comment below.