Forget Big Energy Like GE: Invest in Small-Caps

American Superconductor Corporation (NASDAQ: AMSC) is a small-cap company that designs and develops technologies to maintain and optimize power grids. The largest concern with the company is the large drop in share price since the beginning of the year.

Benzinga reached out to Paul Clegg of Mizuho Securities to learn more about American Superconductor's stock performance.

According to Clegg, the "primary reason American Superconductor lost over $1 billion in market capitalization stems from its biggest client, Sinovel." Previously accounting for over 70% of American Superconductor's revenues, Sinovel stopped accepting shipments of core electrical components on March 31, 2011 and still had outstanding payables to American Superconductor.

American Superconductor has an interesting history. The price topped out at the $43 range and is now currently at around $6.80. The extreme volatility and overall uncertainty associated with the company may present an unfavorable situation for some investors, so one must take care and understand the risks involved.

The stock may or may not experience more downside according to Clegg, and is dependent on American Superconductor coming to a resolution with Sinovel. "There are several other growth prospects for American Superconductor," said Clegg, "but the trajectory starts from a much lower base without Sinovel."

American Superconductor's balance sheet has been steadily increasing over time. Its cash position has been increasing in the past few years, and it has been maintaining a fairly consistent inventory over the last few quarters. The firm's property, plant, and equipment have been increasing over the past few years as well. Interestingly, the company has recently cut 30% of its work force to streamline costs. The move ultimately may benefit the company, as it needs to "modify its cost structure because of the sudden change in operations due to Sinovel."

American Superconductor's liabilities grew along with its assets; payables, accrued liabilities, and deferred revenues all increased. American Superconductor's shareholders' equity has also grown. Both paid-in capital and retained earnings increased over the last three years.

The company's revenues have been improving over the last few quarters and year-over-year, directly increasing its gross margin.

Despite seeing large growth over the last several quarters, the company has been able to keep operating costs at a steady level. As expected, the company's net income has been increasing well over the last several quarters. Based on the information, American Superconductor's has been able to increase its cash on hand significantly. In 2009, the company's cash flow from operations was -$2 million, whereas in 2010, it increased the figure to $41 million.

Currently, American Superconductor is cheaper than its competitors based on price/earnings, price/book value, and price/sales. The company has also been able to present higher revenue growth over the last three years than its competitors (82.3% versus -1.2%).

American Superconductor's debt-to-equity ratio is nearly 0 while competitors have an average of 0.8. While these factors may be positive, the company's return on equity is not as good as its competitors. American Superconductors' return is about 10.5% whereas other energy companies average 14.9%.

Financially, the company may look like an attractive investment. However, as shares of the company have experienced extreme volatility in recent months, investors may consider avoiding the company, especially given the current negative trends in the broader market.