Identifying undervalued stocks with excellent growth prospects has proven to be a successful strategy for many investors. But it’s not always easy to find them.
One stock in my portfolio could be among the biggest winners if the anticipated boom in data centres unfolds as expected. And with its share price falling by more than half since May, now (6 September) could be a good time to consider the stock. Which company am I talking about? Let’s find out.
The big reveal…
Ceres Power Holdings (LSE:CWR) is a producer of solid oxide fuel cells (SOFCs). With more data centres coming online, existing grid connections are struggling to keep pace. SOFCs can be manufactured and delivered on site within months rather than the years it sometimes takes to expand current networks. They are an efficient, low cost, clean way of supplying additional power.
That’s why they are ideal for data centres, although there are many other industrial applications for which they are suitable.
The elephant in the room
But the group isn’t profitable. And in common with all companies in the red, losses need to be funded from somewhere. Indeed, the group surprised investors in June with a £103m capital raise.
The cash will be used to “strengthen the group’s balance sheet, positioning Ceres as a sustainable innovation partner, and allow selective investment to support partner scale up whilst maintaining key intellectual property“.
Those who participated at 570p a share – a 6.5% discount to the prevailing share price — are sitting on a loss of around 30%. Yet, nothing’s really changed since. Investors appear to have concerns that the new technology will not be as widely (or as quickly) adopted as initially hoped.
It can also be a very volatile stock with large swings from one day to the next and, sometimes, big intra-day movements. Some of this might be attributable to the fact that it’s the UK’s fourth most-shorted stock.
My view
However, I think SOFCs are an exciting solution that can help satisfy the needs of energy-hungry data centres. And Ceres Power is seeking to minimise operational risk by licensing its technology to others. In return, the group will receive a royalty based on usage levels.
But there’s mixed news with its partners, which I suspect is another contributory factor to the group’s erratic share price. For example, stock in Doosan Fuel Cell fell 30% on 27 July, after the group reported delays in the receipt of customer orders. More positively, in August, the South Korean company announced that it has secured its largest overseas contract to date, the biggest export order for Ceres Power’s technology.
