WINDERMERE, Fla. (Stockpickr) -- Besides the banking sector post-2008 financial crisis, I can't think of a group that's as hated and despised as solar stocks.
For whatever reason, this entire complex has become a favorite target of short-sellers. There are so many names in the solar sector that are heavily shorted that it's hard to find a name the bears aren't leaning all over. One famous and successful short-seller, Jim Chanos, has even made it publicly clear that he thinks the wind and solar stocks are a bunch of "hot air." Chanos believes that wind and solar are not capable of being sufficient sources of power, and they are not economically efficient.
At the recent Ira Sohn Investment Conference, where all-star hedge fund managers meet to discuss markets, Chanos told attendees that his favorite short position was
. First Solar is considered to be the best-of-breed name in the space, with a market cap of $9.9 billion and a net cash position on its balance sheet of $423.51 million. The company is estimated to reap $3.75 billion in revenue in 2011, but Chanos pointed out that it will have negative cash flow for the year.
Chanos outlined three major reasons that he's shorting solar stocks such as First Solar. First, he thinks that more austerity in European nations such as Germany, Italy and Spain will lead to cuts in government subsidies for the solar sector. Second, big insider selling at names such as First Solar ($3.5 million shares sold last year) is a bearish sign. Third, key executives have left First Solar after their operations chief announced his departure in April.
Chanos has reportedly been short First Solar for the past few months. That's been a winning trade, with shares of the stock down by over 20% the past three months. That said, the solar sector was hit with some surprisingly bullish news on June 2, after Germany said it plans to replace all of its nuclear power generation facilities with wind and solar by 2022. Clearly, Germany is taking cues from what happened in Japan after the a devastating earthquake and Tsunami that hit its nuclear plants hard.
Another catalyst that could soon shift investors back into the solar stocks is the rising price of crude oil. Crude oil was trading over $100 barrel on Wednesday after OPEC failed to lift output after talks broke down with Saudi Arabia over raising production. If oil wants to start another major bull run here, then we could easily see some of the heavily shorted solar stocks get squeezed.
With this in mind, it might be time for traders to
One heavily shorted solar stock that traders need to put on their watchlist is
, an integrated solar-power products manufacturer based in China with a global distribution network covering Europe, North America and Asia. This stock has been hammered in the last three months, with shares off by around 23%. In late February, Trina hit a yearly high of $31.08, but since then it has dropped to its current price of around $19.74 a share. On Wednesday, the stock dropped 9.8% on
Volume registered 7.5 million vs. its three-month average volume of 3.3 million. This was the second-highest selling volume day so far in 2011. The next major long-term
on this stock sits at around $17 a share, which you can see if you pull the chart back one year. There's a strong chance the stock is going to trade into that level since it's broken its near-term support at $20.54 a share on such huge volume.
The current short interest as a percentage of the float for Trina Solar sits at around 17%. This means that out of the 65.14 million shares in the tradable float, 10.98 shares are currently controlled by short-sellers. There's no sugarcoating this -- the bears have been dead right on this trade. That said, if the stock can start to see decreasing selling volume and finds some support anywhere near $17, then look for a potential short squeeze play.
index reading on Trina Solar is currently below 30, which is starting to enter an oversold reading where a sharp rebound could occur. If the stock drops below $17, then I would watch $14.50, which is an even bigger double-bottom support level that dates back to 2009.
I mentioned above, the short case for First Solar, which Jim Chanos has outlined in full detail. This stock hit a yearly high of $175 a share back in February, but since then it has dropped precipitously to its current price of around $116 a share. On Wednesday, the stock closed below its near-term support of $114.40, on heavy volume of 2.1 million shares vs. its three-month average volume of 1.8 million shares.
It looks like First Solar wants to trade down to $110 to $104, which is a longer-term support zone from back in mid-2010. It could even possibly hit $100 to $98 a share if it wants to continue its slide lower. The stock double-bottomed at those second support levels over a year and a half ago. That said, those are the areas I want to watch for a potential short-squeeze rebound play. Market players should watch for selling volume to abate and for buyers to step in. Also look for a daily reversal, where the stock trades down but reverses to close higher on strong volume.
Chanos isn't the only player on Wall Street that's shorting First Solar. The current short interest as a percentage of the float is a whopping 29.9% as of May 13. The shorts have been pressing their bets from the last reporting period by 11.9%, or by about 1.86 million shares. If First Solar can find some support at the levels I mentioned, then look to get long for a potential short squeeze trade.
First Solar, which showed up on a May list of
, was highlighted recently in "
Another heavily shorted solar stock is
, which designs, develops, manufactures and sells solar cell and module products that convert sunlight into electricity for a variety of uses. This is another solar name that the bears have hammered so far in 2011, with shares of by around 26%.
If you want to see a chart that bears dream about, just take a look at the study for Canadian Solar. This stock has been pounded lower by short-sellers from its 2011 high of $16.79 to its current level of around $9.15 a share. That said, the stock looks like it might have found some buying support a few days ago at around $8.25 a share. I would watch this one very closely in the coming days and weeks for a potential short squeeze play if it can hold that $8.25 area. If it breaks below $8.25 then avoid it for a long play for now.
The current short interest as a percentage of the float for Canadian Solar stands at around 15.2%. That means that out of the 29.79 million shares in the tradable float, 4.61 are currently sold short by the bears. The short-sellers have also been increasing their bets from the last reporting period by 11.8%, or by about 486,490 shares. This is a very low float for a stock with such a high short interest. Watch this name for a potential rebound if you see some strong upside volume start moving into this name that's well above the three-month average volume of 1.2 million shares.
Canadian Solar also shows up the May list of
Another solar name that the bears are leaning all over is
, which is engaged in solar power module encapsulant manufacturing and consumer product quality assurance. Its solar business provides encapsulants, which are specialty extruded sheets and film that hold the solar module together and protect the semiconductor circuit of a solar panel. So far in 2011 this stock has been whacked by the short-sellers, dropping more than 25%.
This company had its IPO back in late 2009 and ran up to an all-time high at $28.15 a share in late 2010. The stock has now fallen all the way down to around $14.90 a share. Amazingly, STR didn't sell off with the rest of the sector on Wednesday, which is a small sign of strength. There's some near-term support at around $14.43 a share, which it looks like it might hold. If it breaks below $14.43, then look for a bigger long-term
at $12 a share. Key off these levels so you know where a potential squeeze could materialize.
The current short interest as a percentage of the float for STR is an extremely large 21.4%. This means that out of the 38.18 million shares in the tradable float, 8.23 million are currently sold short by the bears. The short-sellers have been increasing their bets from the last reporting period by 4.1%, or by about 334,594 shares. If we hold $14.43, then look for STR to experience a large short squeeze. This is actually my favorite idea because the name held up so well on Wednesday, while the rest of the sector was destroyed.
Heavily Shorted Chinese Solar Stocks
The Chinese solar stocks are some of the most-targeted names in the market right now. The bears have been circling these names and pounding their share prices lower over the past couple of months. Short-sellers in general are targeting almost every Chinese stock since there are fears that the Chinese economy could collapse into a massive slowdown soon. The markets are also fearful that a rate hike is coming any day now out of China.
Many of the names in this group have blown through tons of support levels and look like complete death. If you bought these or averaged down, you have been annihilated. That said, as a trader, this is the type of action I want to see when I start to look for short-squeeze opportunities in a hated sector. Remember, the shorts might want to lock in some profits soon since they've such big gains -- unless they think these are heading to zero.
There are a number of Chinese-based solar names to put on your radar for potential short-squeeze trades since they all have been beaten down tremendously and could be due for bounces in the near future:
, which has a 40% short interest,
, with a 23% short interest,
Yingli Green Energy
, with a 16% short interest,
, with a short interest of 38%, and
, with a short interest of around 13%
Make sure to consult the charts on all of these names and look for the bleeding to stop and for the selling volume to abate. Also watch for daily reversal candlestick chart patterns as a key indicator that these names are ready to deliver some gains for the patient bulls. All of the heavily shorted solar names should make for great trades as the bears step in to lock in some of their big profits.
To see more heavily shorted solar stocks, including
( ESLR) and
( SOLR), check out the
portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.