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Is Capstone Turbine Corporation (CPST) Ready to Turbocharge Growth?

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Wall Street pros have nothing on retail investors who stake small sums of money monthly on undervalued small-cap stocks. Because the big guns mostly ignore them, these types of stocks offer the best, outsized opportunities for growth.

I screened for stocks with less than $3 billion in market cap, offering earnings surprises of 15% or more in the previous quarter, with forecast long-term earnings growth forecast of at least 15%. One stock that floated to the top was lt-energy producer Capstone Turbine Corporation (NASDAQ:CPST) , which has been selling its micro power plants to oil and gas drillers who use the microturbines.

It recently sold CONSOL Energy Inc. (NYSE:CNX) a methange gas-fire microturbine, the first of its kind in the country and an expansion of Capstone’s portfolio of oil and gas applications, and posted narrower-than-expected losses of just a penny per share, compared with Zack’s analysts forecasts of $0.02 per share. As they anticipate that its earnings will grow 25% annually for the next five years and sporting a $300 million market cap, Capstone Turbine Corporation (NASDAQ:CPST) comfortably makes it into our range for potential investment candidates.

Of course, don’t jump on a stock just for those reasons. It should just be a starting point for more research, as we need to look more closely to see whether analysts’ faith in them is well founded.

It’s all wet
Although there are a lot of potential applications for microturbines, the oil and gas industry in particular has latched onto their capabilities so that more than two-thirds of Capstone’s revenues now come from drillers, up from 25% just a year or so ago. Here in the U.S., drillers are using them to power the rigs in remote areas, but elsewhere in the world they’re being used to meet tough emission standards related to gas flaring.

Flare gas is a form of natural gas that is a byproduct of the drilling process and is vented off as a safety precaution. Yet because it’s both a feedstock and pollutant, it is seen as unnecessarily wasteful and harmful to the environment. Flaring gas is banned here in the U.S. and in several other countries, but until recently it was a relatively unregulated process in Russia. Of the total amount flared globally, Russia accounted for about 40% of the total gas flared off.

That’s changing now, as Russia imposed tough new regulations last year requiring 95% utilization of petroleum gas or being subject to harsh penalties. Those penalties have already increased 12-fold since the start of the year, and they’re expected to rise by 25 times next year. As a result, Russian oil producer Tatneft is embracing Capstone’s technology and became the first driller to ensure that it meets the 95% threshold by deploying its turbines. Last year it installed more than 16 megawatts of capacity, and it plans on building out more on a project-by-project basis.

The Near East and Africa are also major flaring regions, but Capstone has had a tough time cracking their markets so far. Still, as it sells microturbines to major oil producers such as new customer Royal Dutch Shell plc (ADR) (NYSE:RDS.A), it believes it will act as a nose under the tent in getting its equipment deployed there.

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