Why Did Ballard Power Plummet?

A negative report from Citron takes the air out of two high-flying stocks.

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Only two days ago, fuel cell maker Ballard Power (TSX:BLD)(Nasdaq:BLDP) was skyrocketing. The stock increased by 30% that day, closing at $7.63 per share. The increase was not fueled by any new headlines, but rather by continued optimism for the prospects of Plug Power (Nasdaq:PLUG), which uses Ballard fuel cells in its forklifts.

However, in our article on the surge, we made the point that Ballard is a very speculative stock, and not suitable for people with no special insights on Ballard’s technology. After all, the company made only $0.62 per share in revenue in 2013, and is still not profitable.

The stock kept climbing yesterday, reaching $9.32 per share, a 22% gain. Then the bottom fell out. Ballard closed at $5.65, down 25% for the day. Even worse, whoever bought shares at the peak lost nearly 40% of that investment in just a few hours. So what happened?

Citron Research’s negative take on Plug

Right before lunchtime, Citron Research released a report on Plug Power. Citron specializes in publishing negative research reports on stocks that are flying too high, and is well-respected. In the report, Citron suggested that Plug Power, which was trading at $11, could be a 50 cent stock. The arguments were very compelling.

First of all, Plug Power is even more unprofitable than Ballard – even Plug’s gross margins are negative. Management has a history of broken promises. When the company raised money, management balked at buying shares for themselves – even when the shares were trading for under $1. Plug’s sales to companies such as Walmart (NYSE:WMT) are driven by government subsidies that will end in 2016. And nothing is stopping larger competitors from jumping in – if the industry turns out to be profitable.

Plug hurt worse than Ballard

Another interesting point is that Plug does not have any unique technology; the technology is owned by Ballard. Furthermore, Ballard has other customers besides Plug. As a result of the report, Plug’s shares fell even more than Ballard’s, down 40% on the day. Investors who bought at the peak lost nearly half their investment.

Foolish bottom line

The stock prices of both Plug and Ballard have moved together all year, and yesterday was no exception. It is likely that the same investors are trading both stocks.

Worryingly, both companies remain very expensive by almost any standard, reflecting continued optimism in their fuel cell technology. And if the Citron research report is even half right, then investors should not touch either of these stocks with a 50-foot pole.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

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