Shares of Westport Innovations Inc. (TSX:WPT)(NASDAQ:WPRT) have been on an absolute tear, which is a welcome relief for its shareholders. As of this writing, the stock increased by 7% on Monday, and by 33% in the past month alone.

So, that leaves the all-important question: Is this price surge justified?

First, the good news

There are a couple of big reasons why Westport’s stock has done so well. First of all, the oil price has surged recently, going from the low US$40s in March to just under US$60 today. Westport’s natural gas-engine technology benefits from high oil prices, since it makes natural gas-based engines more competitive.

Second, Westport reported better-than-expected numbers for the first quarter of 2015. Revenue of US$28 million beat estimates by about US$1.5 million, and earnings per share beat estimates by US$0.10. This broke a long string of bad news for Westport’s shareholders, and the stock has responded in kind.

Some problems beneath the surface

Make no mistake, Westport’s first-quarter numbers were still awful. They only beat estimates because expectations were already so low.

To illustrate, Westport’s revenue declined by 30% year over year. Even worse, the company’s gross margin declined from 30.8% to 19.3%, partly due to “weaknesses in some markets as a result of the continued low price of oil.”

To make up for these issues, Westport slashed operating expenses by a third. Included in this is a 36% reduction in research & development expenses. Such a cut should be especially worrying, considering that Westport’s technology is still uncompetitive with most diesel alternatives.

Meanwhile, profitability still seems to be a long way off—Westport reported a loss of US$0.17 per share. The company hopes to achieve positive adjusted EBITDA by mid-2016, but this won’t be easy with revenue shrinking so much. And even once this goal is achieved, non-cash expenses (such as stock-based compensation) ensure that net losses will continue.

An overpriced stock

Despite all these issues, Westport’s stock has continued to climb, and is up by more than 50% in 2014. The company is now valued at nearly US$400 million.

To put this in perspective, Westport anticipates generating US$110-125 million in revenue this year (not including revenue from joint ventures), so the company is valued at just over three times revenue. That’s a rich price for an unprofitable company, especially one with a shrinking top line.

Making matters worse, there are reasons to believe the oil rally will be short lived. Now that oil prices have bounced back somewhat, some producers are starting to bring back their drilling plans. This could create an oil price ceiling of about US$60. That wouldn’t be good news for Westport’s competitiveness, nor its stock price.

To make a long story short, Westport’s shares could easily fall right back down. You should stay away.

This one "Pro" move works in ANY market

If the market crashes tomorrow, "Pro" investors know how to take control. Check out our brand-new Ask a Pro website for FREE. Click here now to unlock instant access.


Let’s not beat around the bush – energy companies performed miserably in 2015. Yet, even though the carnage was widespread, not all energy-related businesses were equally affected.

We've identified an energy company we think offers one of the best growth opportunities around. While this company is largely tied to the production of natural gas, it doesn't actually produce the gas. Instead, it provides the equipment required to get natural gas from the ground to the end user. With diversified operations around the globe, we think it's a rare find in the industry.

We like it so much, we’ve named it as 1 Top Stock for 2016 and Beyond. To find out why, simply enter your email address below to claim your FREE copy of this brand new report, "1 Top Stock for 2016 and Beyond"!

Fool contributor Benjamin Sinclair has no position in any stocks mentioned. The Motley Fool owns shares of Westport Innovations.