Investing in Solar: "Told You So"
By Ian Cooper
Why anyone would buy a stock with a P/E of about 1,000 trading at 34 times growth and 11 times book at $65.50 is beyond me. But that’s exactly where First Solar traded on April 25, 2007; exactly where Death Cross Trader initiated a buy on puts; and exactly when we pounded the table about the double-topped stock unlocking 20 million shares on May 15, 2007.
In short, I told you so.
Since then, the stock has fallen more than $10 from the hefty $65.50 price ahead of a May 16, 2007 unlock that’ll add a third to the float.
But Ian, why is a share unlock bearish?
When any company goes public, only a percentage of the company's stock is offered for sale, also known as the float. The rest is held and owned by underwriters, company officers and other insiders. By contractual obligation, insiders and underwriters can't sell their stock for a period of time... usually six months to a year from the date of the IPO. This is commonly referred to as the lockup period, and it’s set up to ensure that insiders cannot profit from the early trading frenzy generated by an IPO. It provides stability because insiders cannot simply dump their shares. Once the lockup period expires, anything goes, and insiders are allowed to sell their shares.
If an insider has realized a significant gain on his investment, he may cash out. And in many cases, insiders cash in and flood the market with shares, forcing the stock price lower. Ordinary shareholders, unfamiliar with the unlock practice, are completely baffled. Share prices are dropping like a cement boot in the East River and they don't know why. Lucky for us, they panic and dump their shares at a loss, only adding to the glut and our profit opportunities.
Here’s how FSLR’s competition fared when they unlocked.
When Sunpower Corporation (SPWR) unlocked shares, the stock fell from about $40 in May 2006 to about $28.
When Suntech unlocked shares in June, the stock fell from $30 to $22.
Aside from First Solar’s 20-million share unlock, take into consideration the "Jim Cramer hype" premium, and uninspiring concerns that polysilicon will slip into oversupply as soon as the first quarter of 2008.
Ian L. Cooper
Editor, Death Cross Trader
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