NEW YORK (TheStreet) -- Long-term solar stock investors (ignoring traders and speculators) fall into one of three categories. You have the lotto ticket buyers buying shares on the cheap and hoping the company doesn't fail.
The second group believes in solar as a replacement for fossil fuels and nuclear. This group knows solar doesn't make economic sense but they don't care. Even if solar power costs more, they are focused on CO2 emissions and other real and imagined benefits solar may provide the environment.
The third group is short sellers who understand the first two groups are using emotion in their decision-making and not proper risk vs. reward analysis. Only one group over a period of three years has made money.
As you can probably guess, the only long-term winners in the solar space are short-sellers. There's a reason I repeatedly write that short-sellers are the smart money and investors should always check short interest before investing. Not only has the "smart money" made a killing shorting solar, it's been obvious enough that many solar stocks were making the most-shorted stock lists month after month.
Unless you can determine and articulate the key pieces of information that well-funded hedge funds are missing, you may want to reconsider buying a stock that is heavily shorted. Take a look at some latest solar short interest numbers:
- LDK Solar (LDK) 4.25%
- SunPower Corporation (SPWR - Get Report) 32%
- SolarCity Corp (SCTY) 23.27%
- Yingli Green Energy Holding Company (YGE) 19%
- First Solar (FSLR - Get Report) 15.89%
- JinkoSolar Holding (JKS - Get Report) 9.67%
Short sellers aren't the only smart people in the room. I think it's a fair assessment to say insiders have their fingers on the pulse of a company. I examined insider buying and selling to gauge their true outlook in the solar space. Regardless of spin and optimism from the C-suite talking heads, nothing speaks louder than actions.
I also want to add one caveat to insiders buying and selling: It doesn't take long for someone paying attention to the markets to read "insiders sell for many reasons, but buy because they believe the stock is undervalued." That's only partially true. Insider selling is valuable information and it's a mistake to totally discount it.
Selling shares may not mean insiders believe the shares are overvalued, but it does indicate they don't think the price is so undervalued that they'd better hold on. Investors don't create alpha (gains above the market average) because they're buying at a fair price; alpha is created when you buy at a discount.
I found a total of 1,000 First Solar shares bought by insiders during the last 12 months compared to 220,000 shares sold. Say what you will about the various reasons why insiders liquidate shares, this paints an abundantly clear picture in my head of the overall outlook for the operation by the people running the company.
SolarCity may have a model that at some point becomes operationally profitable, but it needs to do so before subsidies are cut. Fossil fuel prices are stable to falling, and it's hard to imagine a catalyst reversing record low natural gas prices in the foreseeable future. You may have also noticed that it doesn't cost as much to fill up your tank at the pump as it did a year ago.
As long as we have abundant cheap domestic energy, the urgency of consumers to invest in low return solar projects becomes overcast. Also, any bear thesis on solar would be incomplete without addressing the fact that you can't trust SEC filings by Chinese companies. The only difference between buying Chinese solar stocks and placing a bet on Black 15 in Vegas is a casino will give you free drinks and a meal comp for playing. Yes, either one may pay off 36 to 1, but there are so many better opportunities with less stress and risk for you to prosper with.
After leaving Chinese stocks LDK Solar, Yingli Green, and Jinko Solar to gamblers and the uninformed (sorry, but if you're offended you're not paying attention), investors have few significant solar companies to select from. The first is SolarCity, which is the flavor of the week due to Elon Musk's Midas touch. SolarCity isn't profitable and isn't expected by analysts to become profitable anytime soon.
SolarCity's model contains forward risks that others in the space don't have. Growth may be limited because most other sunny states won't provide the opportunistic regulatory environment and corporate welfare afforded in California. Even if SolarCity becomes operationally profitable, the shares have appreciated to nose-bleed levels. Remember, the greater fool theory of investing only works if you're not the last fool.
SunPower is profitable, and insiders own the majority of shares. Among its peers, SunPower does shine bright. The problem for SunPower is the same as SolarCity: limited growth potential outside of California until unsubsidized cost parity with other electric generation is achieved. I place SunPower as a distant number two in my ranking of solar stocks I would buy.
The next is First Solar. Of all the solar companies, this is the one to own if you must own solar. First Solar is profitable and expected to grow. First Solar is reasonably priced near $60, down from over $300 in 2008, and a price above $100 by this time next year isn't necessarily unreasonable.
While I believe the space is full of peril, and there are many other better risk vs. reward scenarios to select from, a valid argument can be made for First Solar.
At the time of publication, Weinstein had no positions in securities mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.