One of the unique things that sets GeoInvesting’s service apart from other research firms isn’t just the institutional quality of our research – but the fact that we provide it to our members as we work to undertake it. This means that our members get a “cradle to grave” view of our research methodology every time that an investment piques our interest or enters our radar.
For instance, instead of just releasing one final research report on a company once all of the due diligence is done, much like investment banks and other research firms do, we actually let you know the second that a company interests us, and how far along we are in the process of researching it.
We may cover individual stocks for weeks or months before taking a position – or deciding not to take a position. In other instances, we may act on instinct and move quickly, subsequently putting the pieces together in as organized a fashion as possible.
Along the way, we let you know what it is we’re looking for, how we plan on performing our due diligence (i.e. interviews, financial analysis, reading conference call transcripts) and what our concerns and interests are, as we work through the research and analytical process.
This fully transparent view on our methodology is just one thing that we feel sets GeoInvesting’s research apart.
Fuel Tech Enters Radar in March 2018
Fuel Tech, Inc. (NASDAQ:FTEK) entered our radar after its quarterly earnings on March 13, 2018. Since it was the company’s first profitable quarter since 2014, we were eager to quickly begin our research to determine if this was a repeatable event. A good starting point for us many times comes in the way of highlighting notable quarters of microcap companies during earnings season.
The next day, we issued a Call To Action and RFT (Reasons For Tracking) on the stock. RFT’s are our way to bring members timely research on stocks in which we plan to dig deeper:
“We took a starting position in Fuel Tech, Inc. (NASDAQ:FTEK) ($1.57; $37.8M market cap). We hope to be able to schedule an interview with them today. See our full reasons for tracking the company below. FTEK is a world leader in advanced engineering solutions for the optimization of combustion systems and emissions control in utility and industrial applications. The company has two two broad technology segments (defined below) that provide advanced engineered solutions to meet the pollution control, efficiency improvement and operational optimization needs of energy-related facilities worldwide…”
Reasons for Tracking FTEK
- Return to Profitability: After 12 straight quarters of reporting operating losses, the fourth quarter marked the return to profitability. As we mentioned above, the company reported EPS of $0.02. However, our non-GAAP EPS calculation for the quarter was $0.09 vs. a loss of $0.25 in the prior year 4th quarter. At this timeit is unclear if this quarter is the new run rate heading into 2018. We intend to interview management to determine if that is the case. We did not see any mention of seasonality in the 10-K.
- Strong Balance Sheet: The company has a clean balance sheet with:
- Zero debt
- Cash per share: $0.39
- Current ratio: 2.1
- Book value: $1.44
- Tangible book value: $1.35
Our Interview with FTEK Management
As pointed out in reason #1, one of our goals was to interview management, a must in the microcap space.
While we would have liked to interview FTEK management right away, it wasn’t until about a month later that we were able to schedule a call with them. Through this call, we learned more about the company, its technologies, early history, legacy markets and the new CEO’s vision and goals – it was pretty helpful, to say the least.
On March 14, 2018 we began to take a look at FTEK. As promised, our management interview notes follow.
What Does FTEK Do?
FTEK operates two divisions that have historically focused on delivering pollution control technology (when fuel is burned/heated), mainly to industrial customers that rely on coal as the primary source of operation (heating and power generation), such as utility, industrial and municipal solid waste applications.
APC technologies – 62% of revenue
This segment provides three types of methods (stand alone or together) to reduce Nitrogen Oxide level emitted by coal fired boilers.
Management explained that three methods exist to reduce NO2 from boilers that is can accommodate.
- Efficient combustion (burning fuel) processes.
- Selective Catalytic Reduction (SCR) is the most effective, but most costly and well suited for larger boilers.
- Selective Non-Catalytic Reduction (SNCR) is the most economical solution and well suited for smaller boilers.
You can see the rest of our interview notes here.
What Did We Miss Out On & Why?
Two months after the beginning of our coverage, we still liked the long-term story, but felt it was still a bit early in the game. We stated we would continue to monitor the company’s expansion of its technology application into the water treatment industry, as we expressed in our interview notes. We believed they would execute on this plan.
On May 10, 2018, the company reported its Q1 2018 results. The conference call indicated that the company may not have yet reached a point of consistent profitability. We also did not foresee much top line growth for the remainder of the year. We decided to close out our long position. The stock eventually hit a low of $0.97 on July 7, 2018.
Starting in July through late August 2018, the president and CEO of FTEK disclosed, through Form 4 filings, that he was purchasing a large number of shares in the open market, something that we find to be (in many cases) a sign that the company might be on the cusp of a catalyst or transformation. To us, this activity is no doubt one of the top indicators that there may be good things in the cards, as explained here and here.
In light of FTEK’s recent move to new highs on April 8, 2019, it is now apparent that we sold too soon (based on price). After reporting operational progress in its most recent report, the stock is sitting near $2.70. We still think the it might have gotten ahead of itself based on our own criteria, and feel that although we made the wrong “trading” move, we are still proud of the depth of research. It just goes to show that the prevalence Form 4 buying can be a mitigating factor for other criteria or events that might be holding a stock down, and is something to consider when your investment horizon is for the longer term.
For those of our premium members that used our research as a springboard to either strengthen their own case to buy and/or hold the stock for a little over a year, we tip our hats off to them. Looking back, we did everything right except hold the stock.
We, too, learn from our mistakes. Mistakes help us to continue to strengthen our own adherence to investment principles that we hold near and dear to our hearts. With every mistake we make, our process becomes that much stronger. That is why we push the process – we are in a position to educate people on how to take a comprehensive approach investing, and is by far one of the more rewarding parts of being part of the GeoTeam.
Get a week’s worth of our insights and calls to action here. Hope to see you soon!