(Power-One, solar losers story updated to reflect Q-Cells comments on 2011, Friday trading)

NEW YORK ( TheStreet) -- It's been quite a ride up for solar inverter company Power-One ( PWER) in 2010, with a year-to-date return of 140%. Some recent negative pressure on Power-One shares, including big selling on Wednesday, Thursday, and early on Frida, suggests that the solar inverter company is firmly on the radar screen of investors, from the longs to the shorts, who like to dabble in volatile solar stocks.


By the close of trading on Wednesday, Power-One shares were down more than 13.5%. On Thursday, Power-One followed up its big losing day with another near 10% drop and 18 million shares traded. On Friday morning, when Power-One bulls would say that the solar inverter company's shares were clearly in oversold territory, Power-One opened trading down by between 4% and 6%, with a million shares trading hands in the first minutes of the market open.

On Wednesday, it was a report from German solar inverter giant SMA Solar that was responsible for the Power-One share plummet. On Friday, the CEO of Germany's largest solar module maker gave an interview to Reuters. The Q-Cells CEO expressed confidence about the rest of 2010 -- no surprise to anyone -- but also offered a mixed view on 2011, which has been the reason for the unrest in Power-One shares.

In the report from German solar inverter giant SMA Solar on Wednesday, the largest solar inverter company by far issued revised earnings guidance on Wednesday -- ahead of its planned annual Capital Markets Day on Thursday -- that stated operating margins would drop next year as falling subsidies cause the solar market to shrink, according to a recap of the SMA Solar commentary on Reuters. SMA Solar shares were trading down in Thursday's European market trading action, losing close to 3% after a 5% drop on Wednesday.

The Q-Cells CEO told Reuters on Friday, "I still think that 2011 will be a challenging year. But I'm not that skeptical anymore for the first quarter." Most of the solar inverter stocks opened lower on Friday morning, but none with losses in the range of Power-One's continued decline. Q-Cells shares rallied in German trading on Friday, up more than 3%.

Power-One management has stated publicly that its current margins have to come down from the nosebleed levels, but Power-One has also been on the bull side of the solar demand story, contending that other geographies will make up for the feed-in tariff declines in Germany, and expected cuts in Italy.

The commentary from SMA about 2011 demand uncertainty in solar is really nothing new, and the debate about 2011 in solar has been taking place for months already. However, controlling almost half of the inverter market, SMA's visibility probably has more weight than many other solar companies.

The current demand frenzy in solar led SMA Solar to again raise its guidance for 2010 earnings, but it's the more sober 2011 outlook that is having the negative impact on Power-One.

SMA stated that in 2011 the market could grow by up to 20%, but it wouldn't rule out a slump of 10% if subsidy cuts are worse than expected. This is also nothing new, and anyone closely watching the solar industry knows that if subsidy cuts, which are unpredictable, are worse than expected, there will be a huge impact on all companies in the sector.

Liquidity in Power-One shares, a company which came from nowhere two years ago to be among the largest solar inverter companies in the world today, is also showing signs of maturity, with average daily volume now over 5 million shares. Trading in Power-One shares surged past that daily average early in the afternoon on Wednesday, and by the end of the day more than 17 million shares had been traded for the market's biggest stock loss of the day. That may not be Citigroup trading volume territory, but it's pretty significant for a solar inverter company, and a dubious distinction to have the market's signature loss of the day. And Power-One again topped that volume on Thursday, with more than 18 million shares traded during its near 10% drop.

There were only two other days in 2010 during which Power-One had trading volume above 10 million shares, and on both previous occasions, shares of the solar inverter stock were rising.

Advanced Energy Industries ( AEIS) another solar inverter company coming off strong earnings, only has average volume of 500,000 shares. Advanced Energy shares are down this week also, but nowhere near the 25% decline in value of Power-One shares in the past five days.

Additionally, the latest Nasdaq report on short interest showed Power-One as being among the Nasdaq stocks with the largest increase in short positions. Shorts on Power-One went from a little over 7 million shares to more than 17 million shares in the latest Nasdaq bi-weekly short report, which was for the period ended Aug. 13. The 17 million shorts last reported by Nasdaq matched the huge volume on Power-One's big losing day on Wednesday.

Some analysts who have been watching Power-One closely say its all just about Power-One becoming a more popular solar stock, and as such, trading with more volatility, though that seems like an understatement after Wednesday's decline. The most recent news from Power-One was the setting up of plants in Canada and Arizona, and while those moves were expected by analysts, they are not negative catalysts for the stock in any regard. Power-One management is in New York this week making the rounds of the Street green energy and growth stock circuit, but its presentations aren't expected to serve as a negative catalyst either.

The downward pressure on Power-One shares is partially a function of its rapid run-up this year, from a stock trading as low as $1.29 in the past 52-week period to a recent high of $13 in August. Still, the impact of any negative outlook on 2011 given by SMA Solar can't be understated with investors already jittery about the rosy scenario for 2011 presented by many solar companies.

One sign of arrival on the landscape of the investor set that play in solar stocks is becoming a shorting favorite, and seeing the profit-taking that follows any rapid gain in the value of shares. From this perspective, which can be the case for any momentum play, the recent Power-One activity is not surprising.

Walter Nasdeo, research director at Ardour Capital Management, says an important data point for investors to monitor with Power-One is if its shares stay above $10. "As long as it stays north of $10 it's strong," the analyst said. Another analyst who had spoken to Power-One management last week said there was no cause for concern given the current and near-term business environment.

On Wednesday, after its 13.5% decline, which one analyst described as an overreaction to the SMA commentary, Power-One shares were below the $10 mark, at $9.67. By the time of Friday's early selloff, Power-One shares were nearing the $8 mark, recently trading at $8.24.

Nasdeo represented the viewpoint of several analysts who maintain faith in the outlook for Power-One, and believe that the rocky ride is part and parcel of its sudden popularity. "People are noticing Power-One more now and so we're seeing profit-taking and probably shorts," Nasdeo said. The Ardour Capital analyst described the trading action as a good thing, as there aren't many solar inverter stocks with enough liquidity to handle short pressure without a squeeze having an outsize impact on shares.

"It's a company that's appealing to a lot of investors, long, short and in between," Nasdeo said.

Another way of looking at the volatility in Power-One shares is to say: welcome to the solar big-time. Whether it's the SMA Solar commentary or general solar bearishness, being caught up in the debate about 2011 demand is the price solar companies pay for attracting investors. Sometimes they pay dearly.

--Written by Eric Rosenbaum in New York.

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