Can A123 Systems Return to Greatness, Making You Some $$ in the Process?

Before yesterday, A123 Systems

appeared as though it was fated to end up in the vast tech stock junk pile. After all, since its IPO in September 2009, the stock had gone from a high of $28.20 (September 5th, 2009) to its recent all time low of $2.99 (August 8th, 2011). From its onset, A123 seemed destined for greatness, as it has the pedigree of a winning tech company. It is in the middle of the much hyped “green-tech revolution”, is the product of the world-renowned minds at The Massachusetts Institute of Technology (MIT), has been awarded contracts from the U.S. Department of Energy (DOE)/United States Advanced Battery Consortium (USABC), and has the backing of heavyweight investors such as Alliance Capital, GE

, Motorola Ventures, Sequoia Capital, and Qualcomm Ventures (just to name a few). Unfortunately for investors, since its IPO date, the stock has been a major disappointment, losing 78% of its value since its IPO close price of $19.60. The underperformance has been a direct consequence of an endless string of disappointing earnings reports, which have been hampered by rising debt, diminishing cash balances, and continuous operating losses. In fact, since it has gone public, A123 has not posted positive earnings once. All of that may be changing, however, as the company has seemingly found new life after announcing a deal with General Motors

on Thursday to produce batteries for future electric vehicles – specifically focusing on next-generation lithium ion batteries. The announcement was a welcomed event for investors, as it led to a 49.5% surge in A123's stock price. The move pushed the stock from Wednesday's close price of $3.17 to $4.74, just short of the all important $5 level. For those of you who may not know, $5 is an important number due to the fact that many mutual funds specifically prohibit managers from holding equities that are in the sub-$5 range. As the world makes its, albeit slow-moving, transition to electric vehicles, A123 stands to be a huge benefactor (should it stay afloat), as the usability and advanced technology of its products cannot be denied. The company has built and distributed more lithium-ion hybrid systems for transit busses than any other company in the world. The savings on such vehicles are astounding. A bus in New York City using A123's hybrid system, for example, saves 30,000 gallons of fuel its lifetime and prevents 300 tons of Co2 from being released into the atmosphere. Even with 1,500+ units on backorder, there is still much room for expansion for A123, as 74,280 buses are currently in active service in the public transportation arena, along with 440,000 public school buses. That untapped market, along with the ever expanding market of US hybrid passenger cars provides substantial growth and profit possibilities for A123, and this new deal with GM may very well be the first step in that expansion. As you can see at from the chart below, the “earnings” of A123 steadily decreased throughout 2009 and 2010. In 2011 and 2012, however, the company, which is not even factoring in the new deal with General Motors, is projecting a gradual reduction in losses, as it makes a move towards positive earnings – definitely a bullish sign.

Whether or not A123 can return to greatness is solely dependent on its management team, which has a history of cutting earnings estimates, decimating the company's stock price in the process. The new contract with GM, however, may be the first step in the A123's turnaround and may very well provide the growth and profits that investors have been waiting for. Time will tell.

Investors who believe that A123 Systems is set for a turnaround on the heels of the new deal with General Motors might want to consider the following trades:

Investors who believe that the recent surge is just a temporary blip in the stock's eventual run to $0 may consider this alternate position: