First American Scientific Corp. (fka FASC)

[Jagman]

More on coal: Headwaters (No. 58. Fortune Mag pick)

There are few commodities in shorter supply these days than oil and cement. We can all thank China for that. Now imagine a public company that offered potential solutions to both of these shortages. Sounds like an interesting investment, right? Well, that’s why Headwaters is such an intriguing little stock. "They have an incredible patent portfolio," says Alan Norton, co-manager of the Hancock Small Cap Equity fund. "From what we can tell, the technology is all very solid, though there is some execution risk."

Headwaters gets its $774 million in revenue from two main businesses: a construction-materials unit that generates most of the cash flow and an energy-technology division that generates much of the excitement. The construction business sells siding, stucco, concrete, masonry blocks, and stone veneers—all benefiting from the building and remodeling boom. It also sells something called FlexCrete, a concrete alternative that substitutes fly ash (a waste byproduct of coal burning) for traditional cement.

Right now, Headwaters’ energy business is heavily dependent on federal tax credits that can be earned for converting coal refuse into synthetic fuel. In the near term that’s a problem, as the law authorizing the tax credits is set to expire in 2007. Longer term, however, CEO Kirk Benson has high hopes for his energy business, even if the tax credits are not renewed (and it’s still possible that they will be). The dual sources of Benson’s optimism: Headwaters has one technology—already generating revenue in China—that converts coal into diesel fuel. It has another that helps convert heavy oil and oil sands into high-quality synthetic crude.

Couple the abundance of coal in the U.S. and of oil sands in Canada with today’s $65-a-barrel price of crude oil, and you’ve got near-perfect conditions for Headwaters. "The mid-30s is the tipping point where these alternative fuels and the incentives to invest in them really kick in," says Norton. So even if oil prices pull back sharply, Headwaters’ technologies remain economically viable.

"The other issue," says Norton, "is what may come out of any future energy legislation. I think it’s clear that this country needs to develop more internal sources of energy. We have the largest deposits of coal in the world. Given a lot of their technologies, we feel Headwaters is in a pretty strong position."

http://finance.yahoo.com/q?s=HW&d=t