I'm not going to try and concoct an argument against solar stocks. In fact, I'm sure solar technology will do huge things for the American energy crisis in years to come, but I know one thing after watching the market for several years -- any sector or stock that gains a stubborn, cult-like following is probably going to end up suffering at some point in the future. The most cult-like stocks, in my opinion, are momentum stocks.
Don't get me wrong, I play momentum stocks. However, I admit I'm just playing the greater fool game when I'm trading these stocks. In other words, I admit I'm just trying to be another person trying to pull money out of the market by buying an irrationally-priced asset and hoping to sell it at an even more irrational price. The problem comes when investors and traders come along and try to justify the valuation the stock is currently receiving. I've learned a lesson I'd like to share with momentum traders: don't try to rationalize your buys by claiming the stock is 'undervalued' and looks long term, especially if that is way different from your normal decision making process that takes advantage of certain strengths you have cultivated over time.
Tim's arguments for buying LDK Solar could make sense, but realistically, many of them are flawed.
First and foremost, I found the analysts' perspectives and their ongoing Sell rating on the stock as a breath of fresh air. After all, who isn't tired of watching an analyst bearish on a stock at $20 turn bullish at $35. It defies logical investing, which is, after all, what most firms seem to be after (considering the disintegration of sell-side technical analysis departments).
While analysts could be "forced to respect the breakout," in this case they appear to have a fundamental thesis against this stock: the company appears to be signing long term contracts at the current market rate. This is a lose-lose proposition. If the solar sector remains hot, the company will miss out on much of the prosperity because of these recent contracts. Contrary, if the solar sector turns around, the company is making more than competition; well, there goes the solar euphoria.
Another argument relates to the stock performance. Indeed, it trailed solar stocks in preceding months, but the stock is up 100% in the last month while the overall market was just about flat. The 'catch-up' move during the last month has far overpowered any other large solar stock's move in the same period.
Also, with more than 100 million shares outstanding, the 7-8 million shares short leave the short sellers outnumbered by a cool 12:1. Why is this important? Well, it would seem rational to assume that the overwhelming majority of people buying and selling this stock are momentum investors or traders. Accordingly, I assume these 'investors' would not remain steadfast if the stock's price turned around. Long story short: the longs greatly outnumber the shorts in this one and, therefore, weakness will compound with itself once this stock turns around.
The company reports earnings Wednesday and honestly, I have no idea what to expect. But in the long term, I'd steer clear of this stock, short squeeze or no short squeeze, simply because it's too easy to get burned in these fast movers.
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
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Reader Comments (Page 1 of 1)
12-19-2007 @ 4:24PM
ron milner said...
Obviously you are a paid tool. You made no reference to the fantastic numbers LDK has put up. The whole fuss about solar stocks has been that they'll have to lower prices in the future thus cutting into their profitability. LDK has locked in contracts at current prices through 2011. Didn't do your homework did you? Your trashing a great company simply because it's Chinese. Their numbers far outshine First Solar which IS over-priced. You should be ashamed that you don't have the courage as a writer to speak the truth. You are no journalist, you are a Wall Street corporate lackey.
12-19-2007 @ 4:35PM
Sam said...
Kevin, Just wondering if you're short on LDK or any other stocks in Solar sector?
12-19-2007 @ 5:15PM
Bob said...
Are you short LDK or other solar sector stocks?
12-19-2007 @ 4:30PM
Kevin Kelly said...
Hi Ron,
Thanks for the humor. Something I always love to watch is people like yourself become incredibly defensive about stocks they own. The same thing happened when I said CROX is overvalued and very risky this summer...look what happened.
Before you accuse me of being a 'corporate lackey' how about you do some research for yourself. I invite you to click my name and see the volume of posts I produced this summer. Double check the recommendations I've made. I'll own up to anything I got wrong. Come on, Ron. BIDU and AMZN 50-100% ago? Not too shabby. Shorting CROX and UA, a corporate lackey I must be!
Now let's analyze your erroneous post which clearly tried to attack my character rather than my facts. My post was simply explaining why 1) Tim Sykes's reasoning behind his buy was flawed; and 2) why stocks like this don't go forever. How did I do either of those things incorrectly? Tim incorrectly assumed he was a minority in liking this stock -- I explained why that was a ridiculous statement. Additionally, Tim argued that the analysts would change their positions on this stock if it kept soaring, a position which I explained to be ridiculous.
My reasoning on why the stock was a sell was almost purely sentiment-based. My argument was that the money in this stock is probably short term momentum fund managers who, considering it is December 20th, are going to be looking to lock in gains and save their profits for the yearly performance numbers.
Kindest regards,
Kevin Kelly
12-19-2007 @ 4:36PM
Kevin Kelly said...
Sam,
To answer your question: I am not short any solar stocks, or any stocks in general. I am generally a long-only, value-focused investor.
Good question though--Kevin
12-19-2007 @ 5:16PM
Agosin said...
Hi Kevin,
I'm afraid your arguments are correct but that is not to say there isn't upside room left... I know some traders only buy in overbought markets since the theory of following the crowd can go a long way... Look at what Taser did in the past years and that one was overbought from day one... lol
Are you at all following SNTA ? If you do, please let me have your thoughts.
Meantime, greetings to all
12-19-2007 @ 7:30PM
d pickard said...
"Also, with more than 100 million shares outstanding, the 7-8 million shares short leave the short sellers outnumbered by a cool 12:1. Why is this important?"
Hmm.. seems that you don't have a clue. 70 Million of those shares are owned by Mr. Peng, and he can't even sell them until June of '08.
"the company appears to be signing long term contracts at the current market rate."
The company is full up for the next two years, and by the end of that time will have their own source of cheap polysilicon. They'll have plenty of product available for new contracts at that time, at whatever rates will be appropriate based on market conditions.
12-19-2007 @ 8:12PM
khang said...
what do you think about JASO? i have always doubt about chinese company and their number. undervalued or overvalued, the number just doens't add up to the company's evaluation. these chinese companies are only good to invest on momentum or short term. i stay away from them for long term. look tempting though, right?
12-19-2007 @ 8:22PM
Phil said...
Kevin, your 12:1 ratio is kind of misleading since the CEO owns 70% of the stock and the US has only about 17 million shares floating. That means that more than half the float is being shorted. Also, many of LDK's contracts have an adjustable price provision, so they will be able to capture solar's upside in the coming years. The margins have been falling recently, but they start their own polysilicon plant in 2008, which can only help their margins. They have over 10+ billion dollars worth of contracts already, with UBS estimating EPS of 8.10 in 2009. As far as fundamentals are concerned, this is one of the more fundamentally sound solar stocks.
12-19-2007 @ 10:23PM
d p said...
Hi Kevin, I just responded to your article at my blog.
http://americansolareconomy.blogspot.com/
12-20-2007 @ 3:01AM
yale said...
test
12-20-2007 @ 3:16AM
yale said...
Congratulation! Your blog is quite influential to the investors. I was observing the LDK on Google yesterday (Dec. 19). I believe that your post and one of the other post about the delayed conference call initial the panic sell of LDK. The title and timing (4;37pm) of your post is very suspicious. And the title of the other post is very misleading too (LDK conference call (delayed)).
12-20-2007 @ 5:03PM
Kevin said...
Kevin,
I'm trying to understand how does a 12:1 ratio actually compound on the weakness when it starts to decline? and where would you normally get this ratio from?
Kevin
12-20-2007 @ 7:34PM
Movy said...
Hi Kevin,
Thanks for your post, but the information came way to late for me. I'm burned with LDK.
12-20-2007 @ 7:35PM
Kevin Kelly said...
Hi Movy,
I'm sorry that you couldn't see my post earlier. Unfortunately my thesis played out quickly re: momentum money fleeing out. Because of the price action, I really think all these negative comments about my 12:1 ratio being wrong (4:1 seems more correct) are pretty irrelevant.
--Kevin Kelly
12-23-2007 @ 10:24PM
Jeremy said...
Kevin,
Your 12:1 ratio is recieving such negative feedback because you used this figure in an attempt to explain precisely why you thought the possible number of shorts that would be forced to assume long positions to cover their losses, in the event of a precipitous price decline, could not possibly have enough aggregated volume behind them to push price much higher.
Now that "Phil" has properly enlightened your blog with the fact that shorts indeed do make up an adequate percentage of outstanding shares, I believe that it would be very noble of you, this being YOUR blog and all, to simply address the fact that this '12:1 ratio issue' is relevant because is was a central component to your rebuttle of Tim Sykes' relatively bullish evaluation of LDK.
Thus, such negative feedback is relevant and completely warranted. Not only because this error of yours at least partially debunked your anti-LDK/Sykes argument, but also because it draws attention to the poor quality of your homework on the one given topic.
I hope you now realize the relevance of such an error. Overall, keep up the good work, but try to accept the revelation of your own errors more gracefully and move on.