Why Is Westport Innovations Inc. Surging?

Investing in Westport Innovations Inc. (TSX:WPT)(NASDAQ: WPRT) is a lot like riding a roller coaster. By my count, there have been seven days in 2015 where the stock has gained at least 8%. There have also been eight days where the stock lost at least 5%.

That said, there have been a lot more ups than downs recently. So, what exactly is going on? Why are the shares surging? Below I attempt to explain what’s going on.

An oil bet on steroids

For those of you that don’t know, Westport sells natural gas engine technology, and thus benefits greatly when oil prices are high. After all, when oil is expensive, there’s a greater incentive to switch to natural gas.

So, when oil prices started to slip last summer, Westport had to lower its sales guidance. Then when oil prices went into free-fall, Westport really suffered the consequences. To put this in perspective, the company’s stock price fell by over 75% from the end of June to the end of January.

Now, as oil prices start to recover, there is renewed hope for Westport, and its stock has responded in kind. Since the end of January, its stock is up 60%. By comparison, the share price of Suncor Energy Inc., Canada’s largest energy company, has increased by only 7% over this time.

Clearly, Westport has become a popular way to bet on oil. Tuesday offered yet another example. As of this writing, oil prices are up by 3% in the United States, and Westport’s stock has surged by more than 13%.

A speculative stock

Oil bets don’t explain all of Westport’s movements. Back in February the company soared 14% in one day, even though oil prices declined. Likewise, the stock surged right before the company reported earnings in March.

Here’s one explanation for all of this: Westport is a momentum stock. In other words, when the stock goes up, speculators expect the price to keep rising. So, they pile in, buying the stock en masse, which, of course, increases the price (and vice versa when the stock declines). Meanwhile, Westport’s business fundamentals are an afterthought.

An expensive stock

Where does that leave Westport as an investment?

Well, the company is anticipating revenue of US$110-125 million this year. If this guidance is met, it would be the third straight year of revenue declines. As for profits, the company hopes to break even on an adjusted EBITDA basis by 2016.

So, we have declining revenue and zero profitability. Yet the company is valued at nearly US$400 million, or over three times this year’s revenue. This is a very big price to pay.

To conclude, if you’re looking to make a short-term bet on oil, this stock could be a moneymaker. But if you’re looking to invest for the long term, you should look elsewhere.