Headwater: Enormous Potential

05/09/2003 12:00 am EST

Focus:

Stephen Leeb

Founder and Research Chairman, Leeb Group

"We continue to believe that we are within several years of a permanent peak in oil production and that we will eventually have to worry abut a chronic shortage," notes Stephen Leeb in Personal Finance . "One of our speculative recommendations is an unconventional, alternative  energy source--the conversion of coal into clean hydrocarbons--with a growing and undervalued business." Here's Leeb's review:

"Headwaters (HDWR NASDAQ) is the smallest and most speculative stock on our energy list. The stock also has the greatest upside potential. The company's major businesses convert coal into clean alternative fuels and make use of the coal byproducts. In 2002, the company inked a multi-year agreement with China's largest coal company, Shenhua Group. Shenhua will use Headwater's proprietary technology for converting coal into ultra-clean hydrocarbons, which can in turn be refined into gasoline and jet fuel.

"The use of coal as a relatively clean substitute for oil clearly could have a major impact on our quest to find energy alternatives. While the Shenhua agreement could take several years to pay off, the company's synfuel technologies and technologies for using coal by-products as substitutes for concrete are paying off now. Profits in 2003 should climb by more than 30% to about $1.25 a share. The risks are its fairly leveraged balance sheet and some dependence on government subsidies to the alternative energy market. Given the enormous potential upside, the risks are worth taking; buy Headwaters up to 15."

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