What a weekend! I hope you had a great holiday and you were able to begin your summer in style. The weather was beautiful, and the extra day to spend with friends and family was exactly what was needed as the summer begins in earnest.

 

It was probably a good thing that the market was closed Monday - it needed a break as badly as we all did. Now with May finally in the books, we can assess the damage for what was a very tough month during which all of the major indices lost ground. In the month of May, the S&P 500 lost 9 percent, the Dow dropped 8.6 percent, and the Russell 2000 fell 8.3 percent.

 

What does this mean for year-to-date returns as we enter the sixth month of the year? Well, we're pretty much back to square one. The S&P is now down 2.3 percent in 2010, the Dow has lost 2.8 percent, and the tech heavy Nasdaq has posted a fractional loss of .5 percent.

 

Smaller companies have actually fared better. The Russell 2000 is holding on to a 5.8 percent gain, while the iShares Russell Microcap Index ETF (NYSE: IWC) is still up 9.4 percent in 2010.

 

So while May certainly wasn't a euphoric month for investors of all types, those with exposure to small and micro cap stocks may have had some positions offset losses in larger asset classes. Keep this in mind as we move through the heart of the summer - small caps should always have a place in your portfolio.

 

***And the best ones are exactly what we are used to looking for, so let's get back to business.

 

When I signed off last Friday, we had just taken a look at a number of alternative energy stocks. You wrote in with tons of ideas.  As a result, I presented my thoughts on a few of the stronger companies, and I promised to delve into the details of a few others.

 

I now have an inbox full of even more ideas, so I'm likely to discuss several stocks throughout the week.

***Today I want to return to Hoku Corporation (Naskaq: HOKU), a company Byron asked me to take a look at last week. Hoku is a $170 million market cap Hawaii-based clean tech company that operates in three divisions: materials, solar, and fuel cells. It's pretty clear that the eventual profitability of this company will come from the materials and solar divisions.

 

This is a very speculative small cap stock, so don't take this review as an endorsement to buy shares right now. The future of this company likely hangs on its ability to secure additional financing of around $81 million to complete a polysilicon plant in Pocatello, Idaho. Without this facility reaching production soon, this stock will most likely crater. But if the plant gets online, and the market for polysilicon improves, this company could be profitable this year. That scenario would likely send the stock sharply higher.  

 

Without the company's new plant, significant revenues and profitability are going to be hard to come by. Case in point, for fiscal 2010 (which ended March 31, 2010) this company booked $2.6 million in revenues and a net loss of $5.4 million, or $0.23 per diluted share. That performance was significantly worse than in 2009 when the company (only) lost $3 million, or $0.15 per share, on $5 million in revenue.

 

However, one of the interesting things about the earnings press release was a statement that the company installed nearly twice as much PV in 2010 as compared to 2009. CEO Scott Paul stated that his company is part owner of a nearly one-megawatt project completed for the State of Hawaii Department of Transportation. In lieu of sales revenue from the installation, it appears the company will book future revenues by selling electricity generated by the project over the next 20-years.

Adding this revenue stream into the company's mix means that it will operate, at least in part, as a utility company.  If that's the case, it should have relatively reliable revenues from the sale of electricity moving forward.

***I have not yet looked into the details of this arrangement, but would recommend doing so to anyone considering purchasing shares. I would hope to see that projected revenues from the sale of electricity will significantly exceed the one time revenue that would have been booked had there been a clean sale of the equipment and materials for the project.   

 

Mr. Paul is not giving detailed profitability guidance for his company, other than to say that he is “...aiming to break even, or achieve profitability this fiscal year” and that he sees “...2010 as Hoku's year to execute.” With key partnerships, a recent $20 million loan from China Merchants Bank, and an improving market for solar equipment manufacturers, Hoku could indeed be on the cusp of a good year.

 

Management seems confident about completing the Pocatello plant and has recently completed a pilot production run. To date, the company has raised $291 million of the $340 million needed to reach initial commercial production. This will amount to  around 2,500 metric tons of polysilicon annually. When fully operational, the company expects the plant to cost $390 million and produce 5,000 metric tons a year. 

 

This stock was hit hard after it reported results a couple of weeks ago. Investor concerns include dilution from a likely secondary equity offering, timing of the Idaho plant's production, and overall liquidity of the company. Investors should also be aware that the $3.10 stock is only moderately liquid, by micro-cap standards, and has a market cap of just $170 million and around 150,000 shares traded daily.

 

 

 

Hoku Corporation is an interesting company, and worth adding to your watch list. As I said last week, we want to have a watch list of alternative energy stocks ready so we can pounce when the timing is right. Given this company's early stage development, and the significant risks it faces, the stock has the potential to break higher if, and when, positive developments occur.

 

***In the Small Cap Investor PRO portfolio, I follow a number of early stage companies with significant upside potential. These companies also face considerable risks, but the rewards can be huge. To take a look at the current portfolio, sign up for a no-risk trial subscription by following clicking here.