Small-Cap Industrial Tech Firm Energy Recovery Is a Quiet Outperformer

Despite the softness in the major equity indexes recently, industrial technology specialist Energy Recovery (US:ERII) continues to march higher. On Monday, ERII stock gained 1.78%, a far cry from the lowly 0.3% gain posted that day by the S&P 500 index.

For the year, the shares of the San Leandro, California-based firm have far outpaced the market, up 19%,  with sentiment increasing for the company’s core relevancies for desalination and wastewater management. The SPDR S&P Kensho Intelligent Structures ETF (US:SIMS) is up 2.3% year-to-date; that exchange-traded fund allocates 2.4% of its portfolio to ERII stock.

In particular, the former specialty — which involves converting ocean water into potable (drinking) water — generates considerable attention because of the underlying resource shortage. According to the World Wildlife Fund, by 2025, “two-thirds of the world’s population may face water shortages. And ecosystems around the world will suffer even more.”

Matched Guidance

Fundamentally, desalination offers a potentially viable solution as it can provide drinking water in areas devoid of potable water. However, the main impediment to desalination centers on the economics of the process. Incurring high costs to build such plants — let alone operating them — this well-intended initiative quickly suffers from sustainability concerns. Further, unfavorable fluctuations in energy prices can significantly devalue the overall proposition.

On May 3, Energy Recovery released its first quarter of 2023 financial results. Although revenue slipped 59% year-over-year to $13.4 million, the tally clocked in within management’s February guidance. Also, the company reported a 6% expansion in operating expenses in Q1 compared to Q4 2022, stemming from growing sales and marketing expenditures in support of new businesses.

“As we guided in February, our desalination revenue for 2023 will be heavily weighted to the second half of this year due to the expected timing of megaproject shipments, which is how the year has started. As previously indicated, we expect our desalination business to grow between 3-7% this year,” stated in part Robert Mao, chairman, president and CEO of Energy Recovery.

Unusual Options

Since the May 3 disclosure, ERII stock has gained nearly 12%. Moreover, following the close of the May 15 session, Energy Recovery stock fast rising on Fintel’s screener for unusual stock options volume.

Notably, call volume for ERII stock hit a whopping 3,001 contracts against an open interest reading of 2,474. On average, call volume reaches only 17 contracts. On the other side of the equation, put volume landed at only 3 contracts against open interest of 466. Typically, put volume reaches 4 contracts.

Overall, options sentiment appears very bullish. Per Fintel, ERII’s put/call ratio sits at 0.19. Since calls (the denominator) generally represent bullish wagers, those put/call ratios below 1 indicate optimistic sentiment.

This article originally appeared on Fintel

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