Technology and oil are not the obvious places where you should hide in a plunging market, yet the shares of Intelligent Energy (LSE: IEH) and San Leon Energy (LSE: SLE) both rallied over 20% in early trade today, bucking the trend of declining stock markets worldwide. Why is that? And should you buy either?
Intelligent Energy: The Right Tech Name For You?
“British firm Intelligent Energy has claimed a breakthrough in building smartphones that run for a week on a single cartridge,” The Telegraph reported after the market closed on Friday, news of which pushed the stock higher today. “Intelligent Energy has the technological know-how to power your iPhone for a week without recharging.“
What you are buying: The shares of this fuel cell business were listed at 340p in July 2014. Following a 30% rise at one point today, they traded in the region of 114p for an implied market cap of £210m. They have changed hands in the 67p-291p range over the last 12 months. They were priced at 106p at 10.45 BST.
Opportunity: A top-down approach suggests that Intelligent Energy could be the right tech name for your portfolio, particularly if you believe that hydrogen fuel cells will replace fossil fuels in the automotive industry over the long term. As a matter of fact, many companies have delivered big statements in recent years, yet their so-called value propositions have often miserably failed to live up with expectations.
Financials: Its financial position doesn’t look too bad. Some 40% of its market value is represented by cash and cash-like items. For the six months to the end of March it had net cash of £58m, and reported negative operating cash flow in the region of £27m on revenue of about the same amount. It’s possible that Intelligent Energy will need more funds to finance its development, given that the run-rate for R&D and operating costs is about £45m annually, although revenue growth is expected to outpace the growth of its cost base. It has options, however, and dilution risk seem to be already priced into its equity valuation.
My take: The group is unlikely to be in the black for a couple of years at least, but its operating earnings could surprise if its healthy pipeline delivers (that’s a big “if”, of course!) Elsewhere, trading multiples do not provide much help at present, so its shares remain a risky bet — but if you are invested, you’d do well to retain exposure to IEH for the long term at its current valuation.
San Leon Energy Is a Takeover Target
“The board of San Leon notes the takeover speculation regarding San Leon in yesterday’s press. The board of San Leon confirms that it has received an approach from a possible offeror, that may or may not lead to an offer being made for San Leon,” the group said today.
Its price-to-book value points to a bargain trade, but other trading metrics send mixed signals.
There have been a few positive news on the operational side earlier this year, yet the stock is down about 40% to 60p in 2015, a level that is not far off its one-year low of 48p. Exploration costs are meaningful, and so are administrative expenses, its annual results show.
I doubt the market is willing to take the risk of betting on its stock if the company doesn’t attract new partners or new funding, which suggests that management may accept a lowly offer below 100p a share. That is implicit in San Leon’s share price movement today, I’d say.
Considering all this, I would give it a pass.
I am after solid winners, so I'd rather bet on a small-cap stock with defensive characteristics, whose steady earnings and cash flows are backed by a solid cash position.
Today the shares of this defensive play are outperforming the FTSE 100 by 4 percentage points!
Its prospects are discussed in an exclusive FREE report that has been put together by our team of analysts, who argue that its stock could easily deliver double-digit returns over the very long term. It's your call, but I am sure this report will help you assess the risk of this palatable investment.
Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.