We spent a lot of time after the market closed yesterday discussing the merits of KFx (KFX) , our controversial clean-coal play.
Here are the pros and cons of holding this stock, and the action we have decided to take.
First, the pros. The company has a potentially game breaking technology that strips toxins from low energy Western coal while simultaneously increasing its BTU's. It also has a well respected coal player, Arch Coal (ACI) , interested in the success of K*Fuel, which bolster the credibility of the story. In addition, the potential tax incentives for clean coal would have a dramatic impact on the company's margins, the company has finally selected a location for its first K*Fuel plant, and management is accessible and open with us about construction progress. Finally, from a pure trading perspective, the shorts are all over this stock and it would take close to a month of trading for them to cover their positions.
The cons: The shorts are relentless. They have no boundaries to their zealous selling, and seem to ignore the fact that there is very little stock available to short, continuing to short it aggressively even after it has already fallen nearly 40% from its peak. Beyond the shorts, the company has not been able to bring K*Fuel to market, even though it has been working for years to perfect the process, and the Energy Bill is stalled in Washington, so the clean coal incentives are now part of the Jobs Bill, but neither will likely be passed before November.
After weighing all of these issues, we've decided to sell the entire KFx position. We have an 18% gain in this controversial stock, and we don't want to risk that profit any further because, frankly, this stock is too polarized. The bulls are blindly positive and the bears are blindly negative.
We value performance over emotion. It took three and a hal-half painful months to reach this 18% gain, and during the same period the Nasdaq lost 3% of its value. Let the bulls and bears continue their tug of war in this one, we are ready to move on. After you read this we will sell out final 500 share with the stock opening around $7.95.
We have our eye on several candidates to replace KFx, including a small, development stage biotech play that also has game breaking technology.
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