Here's a little secret for investors looking to take big swings at potential multi-baggers: seek out small, poorly-followed, heavily-shorted stocks in out-of-favor industries. Pick the right one at the right time and the gains can be tremendous. That was shown yet again last week as carbon fiber producer Zoltek (Nasdaq:ZOLT) obliterated analyst expectations and reignited hopes that wind power and green power stocks may have a better 2012 in store.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Great Results Across the Board
Zoltek is followed by just three analysts, and we're not exactly talking about Morgan Stanley or Barclays here, so "beating expectations" has to be taken with a grain of salt. Still, Zoltek reported that revenue rose 43% from last year and blew away the revenue estimate by 30% as the company saw a 33% jump in shipment volume.

Profitability was also surprisingly strong. Gross margin more than doubled and the company reversed a year ago operating loss. At the bottom line, Zoltek reported earnings per share of 28 cents against an average analyst guess of 5 cents. (For related reading, see Analyzing Operating Margins.)

Low Gas Is Good for Somebody
Although I was not out in print predicting a great quarter for Zoltek (nor do I own shares), I'm a little surprised that analysts didn't see a better gross margin in the cards. Natural gas prices have been plunging and propene (which can be produced from natural gas or refining oil) is a major feedstock for the acrylonitrile produced by companies like DuPont (NYSE:DD), Dow (NYSE:DOW) and Solutia (NYSE:SOA), and turned into carbon fiber by companies like Zoltek.

Even if natural gas has set a new bottom, it doesn't seem like prices are going to be jumping back and retesting highs anytime soon. That suggests, then, that Zoltek could be looking at a favorable input cost environment for a little while.

Is the End Market Healthy?
Zoltek is a carbon fiber company with a particular skill for producing this commodity at low costs relative to other industry players. That said, with more than half of the company's sales going into the wind power market (where major customers like Vestas use it to make wind turbine blades), it trades like a green power play.

Management talked about its expectations for sizable multi-year increases in large turbine demand, and other wind power-related stocks like American Superconductor (Nasdaq:AMSC) traded up on this optimism. How realistic is this?

Global wind power installations dropped in 2011 and are expected to be up only slightly in 2012, as the industry reacts to major cutbacks in government grants and aids targeted at renewable energy like solar and wind. Still, the long-term outlook is more favorable and turbine producers like Gamesa, General Electric (NYSE:GE) and Siemens (NYSE:SI) have all echoed the "tough times today, lots of opportunity tomorrow" thesis recently.

Can Zoltek Thrive in a Commodity Business?
Zoltek is an odd company in some respects. Where Hexcel (NYSE:HXL) and Cytec (NYSE:CYT) focused on high-value applications for carbon fiber in aerospace, Zoltek has focused instead on becoming a low-cost producer of more commercial-grade fiber. That puts the company in competition with huge established chemical companies like Toray, Toho Tenax and Mitsubishi Rayon.

That doesn't sound like an especially great strategy for a smaller company in a cyclical industry prone to periods of over-supply, but Zoltek's cost focus could work in the long run. Moreover, as carbon fiber costs keep dropping, the company may be in a good place to take advantage of more carbon fiber usage in industries like automobiles and energy. (For related reading, see Cyclical Versus Non-Cyclical Stocks.)

The Bottom Line
Zoltek clearly needs for companies like Vestas to see solid sales opportunities to really thrive. Although 2012 may not be a year of a sharp rebound in installations, it may well be the year where conditions stop getting worse and investors start feeling optimistic again about the long-term future of wind power.

While a lot of the Zoltek outperformance can be explained by short-covering (19% of shares were short) in an under-followed stock, the fact remains that the company was profitable and the cost structure should be favorable for a little while yet. This is more of a story stock than a fundamentals-driven stock, but if the wind power story picks up steam in 2012, the stock could have further to run.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center