Blessed by the Potato

I took a look at Zenn Motor Company (ZNN on the toronto venture exchange) and it looks pretty bad, maybe bad enough to short.

They’re a company that produced what are basically glorified golf carts (low speed electric vehicles). Their plant is in Quebec, so they were a bit of a Canadian success story for a while, except that they couldn’t quite turn a profit, and Canada wouldn’t license their cars to be used on our roads.

Now they’re going to shut down their manufacturing business and become a “solutions provider” — try to sell their electric drivetrain to a larger OEM. Makes sense since they’ve been burning through their pile of cash and their prospects haven’t been improving much. Except almost all the major car companies already have home-grown electric car divisions, so I can’t see this strategy actually working for them, especially since their drivetrain was fairly unremarkable.

The one thing they do have is an interest in EEStor, a private company developing a “revolutionary” energy storage system for electric cars. Zenn owns 10% of EEStor and has exclusive rights to distribute the EEStor capacitors for automotive use.

Tangible book value of ~$0.30/sh, and ZNN is trading at ~$2.50, so people are basically paying $2.20 for that piece of EEStor.

Now EEStor may have something that works as claimed — supposedly someone at Lockheed-Martin got to look at a prototype, but they haven’t been too open about what they have yet. More importantly, they claim that their capacitors can be produced cheaply, which has yet to be demonstrated. Production was supposed to have started in mid-2008 originally, and here we are into 2010 and we have yet to see the first unit.

I seriously suspect EEStor is just smoke-and-mirrors, and was considering putting my money where my mouth is on that front by setting up a short on Zenn.

Unfortunately on the off chance that they do have something real a short could go quite badly. Also, since Zenn has essentially no debt to speak of, there’s no near-term default-type event to push them down, so we could be right but still lose money if it takes years for them to finally burn through their cash and hit zero.

It looks like a case where the short thesis could be completely right: the company may be worthless in the long run, and EEStor’s long-awaited technology may not be competitive with what the big players have developed in-house for batteries if it ever comes out at all… but you still couldn’t make money off the short since the stock is all hype, and more empty promises from EEStor could send the stock to the moon between now and when it does finally hit zero.