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Time To Sell Solazyme

This article is more than 9 years old.

At the end of August, I wrote about Solazyme (NASDAQ:SZYM) as a company with the potential to double in two years. Since then, the stock has dropped 68%. In this article, I’ll explain what happened, and tell you what I think shareholders should do now.

What Happened

Solazyme’s third-quarter revenues were up an impressive 65% to $17.6 million. However, prices for the commodity oil products that the company planned to produce, have fallen so far, that management has decided to shift their capacity to higher-value specialty products.

The company planned to produce commodity oil products to base-load their plants, so they can operate them on an efficient scale. This makes sense as long as the commodity products can be sold for more than their incremental costs of production. When the commodity prices fall below Solazyme’s incremental production cost, as appears to be the case, it makes sense to stop producing them.

The company has some impressive customers for their higher value products such as ADM, Unilever, ENI, Bunge, Akzo Nobel, Mitsui, and Versalis. But, it is unclear whether the demand for these products is enough for them operate their plants at sufficient scale, to drive down their production costs.

Wall Street was projecting revenues of $274.8 million in 2015. The reason the stock has dropped so much, is that without the commodity products, revenue will be around $70 million. Nevertheless, I think management made the right decision here.

Two things to track going forward are:

1) The price of the commodity products. Higher oil prices are good for Solazyme because when it is profitable to produce these products, there is no question that there is sufficient demand for them to operate their plants efficiently.

2) Volumes of their higher value specialty products. Some of these products have the potential to ramp up quickly with the customers they already have. If there is sufficient demand for these products to operate their plants efficiently, they may never need to use their capacity to make low-margin commodity products.

What To Do Now

If you have lost confidence in the company and the management team, there is no question you should sell.  However, even if you still like the company, I think you should sell in order to recognize the loss for tax purposes.  In the U.S., you would get a tax benefit only if you don’t repurchase the stock within 30 days. So, if you like the company, the key question is whether you think the problems facing them can turn around quickly enough for the stock to rebound in the next 30 days.

I think the management team chose the best course possible given the price level of the commodity products. However, I don’t see how the situation can turn around in 30 days, so I have no problem selling and staying out of the stock for at least 30 days.

My Take

When it comes to stocks that have the potential to double, portfolio management is key.  If your judgement is good, maybe 2/3 of your picks will be profitable but that means 1/3 will lose money.

If you never sell the losers, you eventually end up with a portfolio full of losers, and you never get any tax benefit from recognizing the losses.

But if you have the track record, choose enough stocks, and deal with the losers as they come up, the gains from the winners can more than make up for the losses on the losers and produce a great portfolio return.

Connect with Ken Kam on LinkedIN.

Disclosure: I am the portfolio manager for mutual and hedge funds advised byMarketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.