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.

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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.

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

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