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Storm Clouds Over First Solar Are Real

NEW YORK ( TheStreet) -- What a difference a quarter can make. After the latest First Solar (FSLR - Get Report) earnings report, short-sellers took a beating as shares doubled in price.

After taking a deep dive into the earnings report, I had zero desire to drink the Kool-Aid and began warning investors they should consider locking in profits.

As I often am, I was early when I wrote this article "Solar's Short-Squeeze Days Are Numbered."

It's hard to judge when logic will regain control over emotion, but if there is a lesson to be learned, it's that emotion is a sprinter and logic is a marathon runner. It can take time for logic to catch up, but it always does.

I made up for the early-bird article with another more timely warning titled "First Solar May Have Just Signaled It's Overvalued."

Although First Solar didn't display a need for capital injection, the solar company disclosed a shelf offering of almost 10 million shares.

Although it's not unheard of in the technology space, it's far more common for pharmaceutical companies to sell shares to shore up working capital. Typically, they do it after FDA approval or another positive catalyst. But First Solar enjoys one of the best income and balance sheets in the space.

Granted, it's more or less the cleanest shirt in the dirty laundry bin, but the shelf offering seemingly came out of nowhere. Management stated one of the possible uses for the capital injection was to go shopping for acquisitions. Buying other solar companies is somewhat of a head-scratcher because First Solar's advantage is supposedly its lower cost for a given amount of energy produced.

Why buy plants that produce solar cells at a higher cost than your own, especially if you have to pay a premium? I'm sure there are some unique situations that can provide synergies and growth potential, but production capacity restraints don't appear to be limiting the revenue. In other words, First Solar knew it should go to the well while the going was good.

First Solar did buy General Electric's (GE - Get Report) intellectual property rights for cadmium telluride solar technology; however, GE received stock instead of cash. GE must hold 1.75 million shares of First Solar for three years. If First Solar buys something significant within the next 12-18 months, I will evaluate it in relation to the capital injection, but until then, I'm sticking with the idea that First Solar sold shares because management thought it could receive more cash than the shares were likely worth.

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