Fuel Systems Solutions: Time to Take Profits

Fuel Systems Solutions (FSYS) has had a tremendous rise since my piece back in April. The shares have nearly quadrupled in less than three months and are due for a correction, They have simply gone up too far in too short of a time frame.

The shares are pricey: Trading at 38 times 2008 earnings estimates and nearly four times book value of $9.70, the stock is vulnerable to some hefty selling if FSYS fails to execute its business plan flawlessly, as this equity is priced to perfection and beyond.

Analyst downgrades: Both Broadpoint Capital and Canaccord Adams each lowered their opinions from buy to hold, while Lazard Capital still maintains a hold rating. Broadpoint and Canaccord share one year $28 price targets. I think their $28 target could be on the high side and see a more realistic target of $24, as it's often typical for stocks to retrace 50% of their gains.

The shares have been running up a lot on pure emotion as momentum traders try and ride FSYS as an instrument to mirror the rise in crude prices. The company was added to the Russell 2000 index Monday creating even further demand.

Potential sellers: Three Mutual funds, Invesco, FMR and Wilderhill Powershares each own about 9% , totaling 27% of FSYS's outstanding shares. They all have substantial gains that they may potentially want to book by actively selling shares. This added supply of shares hitting the market could put a big dent in the share price. Mariano Costamagna, the CEO and largest single shareholder with a 11% stake, may also be tempted to "cash in" on the company's windfall.

Another potential pitfall: Management might decide to take advantage of the spike in the share price by issuing a secondary offering to raise capital. The additional shares printed will cause dilution as well as flood the market with a much larger supply of shares creating downward pressure.

Don't get greedy on this one. Its risk reward ratio presents a scenario that offers much more downside risk than upside potential. Book your profits and move on to something with more compelling prospects. For those who wish an adrenaline rush, opening a short position at this juncture might be very profitable.

Disclosure: Author has a short position in FSYS

Comments

[Erin Young]

What about the strong fundamentals and potential huge market this company now finds itself in? I think these arguments outweigh your poor attempt to drive the share price down.

[KPL]

Most American investors do not have a clue as to how LPG conversions are going gangbusters around the world. Thailand is increasing it's LPG imports 5 fold to fill demand. They also have a shortage of gas cylinders for vehicles and are starting 4 new cylinder manufacturing plants. Indonesia has started converting 436 Taxis a month. Manila is now converting all public transportation and 20% of government vehicles to natural gas. There is a scramble on in Malaysia as the government has ended petrol subsidies. Petronas is going to construct an additional 200 natural gas stations there. Venezuela plans to have 500,000 NGV's by the end of 2009. Iran is manufacturing 250,000 cng cars this year. Peru is converting 50 to 60 cars a day. Enquiries for conversion are up 10 fold in England. There is a waiting list in Australia for LPG conversion. India, Pakistan and Bangladesh are into it big .Russia is planning to build natural gas filling stations across Europe. I have all these articles and more posted on the yahoo board for wpivf.pk. If an investor should see the big picture and want to invest, how many publicly traded conversion companies are there to invest in?
FSYS is all over the world.

[Upperman33]

Nice call. Down 15% today

[Paul Adal]

The Holy Grail: U.S. Adoption Of Natural Gas Fueled Vehicles
– The number of gaseous fueled vehicles has been growing at a 23%
rate since 2000, but it’s not obvious to U.S. investors because the
growth has been almost entirely outside of this country. However,
we believe the U.S. is now at the tipping point of increased adoption
of gaseous fueled vehicles driven by high oil prices, political desires
for a domestic energy solution, and increasingly stringent worldwide
emission standards. We believe a number of catalysts are on the
horizon to spur the U.S. market, the largest being a ballot initiative
this November in California that would create a $2.9 billion fund to
provide incentives for alternative fueled vehicles.

[writermark]

I was surprised the shares did indeed drop so fast in such a short timeframe. The recent $7 sbnapback was impressive, however that spike too is suseptible to another dose of profit taking. I'm still ready to go long in the mid twenties, but not before.