Can NFE Stock Beat the Market?

New Fortress Energy (NASDAQ: NFE) has woefully underperformed the S&P 500 (SNPINDEX: ^GSPC)
with a 93% decline this year. Zooming out doesn't make it much better, with the stock down by 98% over the past five years. Meanwhile, the S&P 500 has logged one-year and five-year gains of 17% and 86%, respectively.

Bullish investors are viewing New Fortress Energy as a "down but not out" play that can become a winner if a long-term contract pans out. Can New Fortress Energy Stock beat the market going forward?

Image source: Getty Images.

The Puerto Rico contract is a major catalyst

Most of the optimism centers around a seven-year contract with the Puerto Rican government that one analyst projects will come to $3.2 billion. The contract will improve Puerto Rico's grid stability with natural gas and support cleaner power generation for Puerto Rico's energy system That averages out to roughly $457 million per year.

While not all of that $457 million is profit, it can greatly help the company. New Fortress Energy reported $301.7 million in Q2 revenue, which was down by almost 30% year over year. The Puerto Rico contract can double the energy company's total revenue. New Fortress Energy also told investors in its Q2 press release that its developments in Brazil, Nicaragua, and Puerto Rico should increase core earnings as they come online.

The balance sheet is horrendous

Although the Puerto Rico deal is a good development, New Fortress Energy needs perfect execution to remain solvent, never mind beating the S&P 500. The company entered into forbearance agreements after missing interest payments this month. Those are some of the last payments a company is supposed to miss, and it indicates a weak balance sheet.

New Fortress Energy is bleeding through cash and currently spends more than $200 million on interest each quarter. Almost two-thirds of its Q2 revenue went to interest payments, resulting in a massive net loss.

The balance sheet shows $1.48 billion in total current assets and $2.20 billion in total current liabilities. Combine that with a streak of quarterly earnings that feature net losses, and it's heavily relying on the Puerto Rico deal just to stay afloat. New Fortress Energy also needs high margins from that deal to catch up with its debt, and its previous quarterly margins don't offer much optimism in that regard.

Stick with quality companies

There is a chance that New Fortress Energy turns things around, but a 98% drop over the past five years suggests otherwise. If anything, the stock may be eligible for a meme rally, especially as other developments get closer to going online.

Perfect execution is required just to keep the company in business. It's never a good sign when a corporation can't make on-time interest payments. Investing in an index fund has been more rewarding than holding this stock, and that pattern is likely to continue.

Investing in companies with solid fundamentals, attractive growth prospects, and healthy balance sheets will give you a better shot at outperforming the S&P 500.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.