Headwaters (symbol HW) -- what is really going on?

One of the most interesting stocks in the market in recent weeks has been Headwaters Inc., a small company headquartered in Utah. HW has a market cap of about $275 million, and its price has gone from $2.60 in July to about $4.75 as I write this. This price rise of over 80% in just five months is, in part, a bounce off of lows that the company hit when its financial security was in question. Most of those issues have now been resolved, and the earnings estimates for the company have also improved. Headwaters, however, still has estimates of future losses for the next two fiscal years (It only reaches a loss of $0.41 per share for fiscal 2012). The company operates in three fields: construction materials, coal combustion products and alternative energy. It used to be the leader in low pollution coal, but it was dependent on federal tax credits that ended a few years back and took the whole field with it.

So the real question with Headwaters is this: What is going on that is taking the stock up day after day? In just the last six weeks, the stock has gone up by $1.35 on a base of $3.40. Volume has also been increasing, although not as dramatically as price. For example today, the stock has already traded over 589,000 shares as of noon, a total which exceeds both the 10 day and 90 day average volume.

I have owned shares in the company periodically over many years. The last six months are the best sustained performance by Headwaters that I recall ever seeing. The company also has options that have nice premiums, a fact which makes the stock more attractive. Right now, were one to buy the stock for $4.75, the May 5 calls could probably be written for $0.60. this would mean a cash return at an annualized rate of over 30% while retaining the possibility of some further small appreciation. The May 6 calls could bring in about half as much while providing for a much larger appreciation.

Given the long term trend in this stock and the heavy volume, I have to assume that something is happening here. Honestly, however, I am not sure what it is. Both the duration of the climb and its slow and steady nature tell me that this is something real. I usually like to have a reason for such a move before I jump in, and I do not have a satisfactory one here.

Nevertheless, I think it is worth pointing this stock out as one that has undergone an accelerating transformation over the last six months. I am not recommending a purchase; nor am I recommending that you stay away from it. I just think that it bears watching.

Disclosure: I am long the stock and have covered call options written on about two thirds of my holdings.