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Why LDK Solar (LDK) is not a buy

LDK Solar Co. (NYSE: LDK) is one strange solar stock. Yesterday, on a day when other solar companies like Solarfun Power Holdings (NASDAQ: SOLF), Canadian Solar Inc (NASDAQ: CSIQ), First Solar Inc (NASDAQ: FSLR) and JA Solar Holdings (NASDAQ: JASO) were all strong and despite earnings coming in at the high end of expectations and guidance solidly ahead of estimates, their stock was down. Not only was it down, but it also tried rebounding, only to fail. Not good at all for the bull case.

Experience has taught me to respect the price action the day after earnings. So when I see LDK trying to break out of a now 5-month old range, pretty much between $30 and $40 -- yes it was up to $50 in January and $20 in March, but those are outliers -- this is a very bearish sign. It's so bearish that I suspect that unless solar plays really heat up again, this stock will need many more weeks or months to break $40, and even then, it's got a ton of resistance all over the place due to bitter buyers in at much higher prices who will be looking to cut their losses.

And then you have all the sketchiness. Yes that's a very technical term because it doesn't matter whether I'm referring to margin, business model or accounting concerns, LDK Solar is sketchy. That's why it's way off its highs when most of the other solar industry leaders are near, at or breaking out to new highs. Sure, this might just be the undervalued one of the bunch, but I like to play by the odds and the odds favor buying momentum stocks that are breaking out to new highs, not momentum stocks languishing near their lows.

This stock is a like a sprinter who got in a car accident and has now forgotten what it's like to run with the rest of the track team!

Timothy Sykes writes the blog timothysykes.com, is a former hedge fund manager, star of the TV show Wall Street Warriors and author of the book, An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund.

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Last updated: July 09, 2008: 08:27 AM

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