First Solar and LDK: Two Solar Power Stocks Headed in Opposite Directions

Submitted by Investing Daily as part of our contributors program.

The past few years have been brutal for solar power stocks. First, the 2008-2009 financial crisis scared away customers and depressed sales. Some solar firms benefited from government stimulus packages during the recession, but their prospects have since dimmed as debt-saddled governments rein in spending—including on subsidies for new solar projects.

Looming in the background is a glut of solar panels that has lasted for more than two years. That has depressed prices and put severe pressure on the profits of many solar power stocks.

This Solar Power Stock’s Downward Spiral Is Continuing

Case in point: LDK Solar (NYSE: LDK), which just reported a net loss of $254.3 million, or $2.00 a share, in the second quarter. That was much wider than the $87.7 million, or $0.62 a share, that the company lost a year earlier. It was also far worse than the $1.42 a share that the Street was expecting. Revenue dropped 53%, to $235.4 million, also missing the consensus estimate of $237.5 million.

LDK is the world’s second-biggest maker of wafers, which are used to collect sunlight and convert it to electricity. The company is based in China’s Jiangxi province.

Due to the ongoing oversupply and weak demand, LDK also cut its third-quarter revenue forecast to between $220 million and $260 million, far below analysts’ expectations of $453.6 million. For the full year, the company is calling for sales between $1.1 billion and $1.5 billion, again shy of the Street’s forecast of $1.76 billion.

To generate much-needed cash, LDK is now selling off assets— including about $50 million to $60 million worth in the latest quarter. The ugly numbers shaved 5% off the stock, pushing it down to $1.18 on Monday—a new record low.

First Solar Is Soaring Above Other Solar Power Stocks

In light of the strong headwinds facing the industry, it’s perhaps surprising that shares of another solar equipment maker, First Solar (NasdaqGS: FSLR), have been on a tear of late, having nearly doubled since June 1, to today’s price of $23.25. The stock is not for the faint of heart, however: it has ranged as high as $25.70 and as low as $18.65 during that period.

In response to government subsidy cuts and the solar panel glut, First Solar has started shifting shifted its business away from focusing on equipment and toward building huge (and costly) new solar farms and selling them to utilities. The company also sells its parts to the buyer of the plant, as well as its expertise, including in construction and ongoing maintenance.

In addition, First Solar sells the farms’ power to electric companies, usually under long-term contracts. For example, First Solar recently sold the 72 megawatts of electricity that will be generated at two solar farms that it is currently developing in California to Pacific Gas & Electric. Construction is slated to start on these two projects, called Lost Hills and Cuyama, in 2013. They could join the state’s power grid in 2019.

Meanwhile, the company’s sales jumped 80% in the second quarter, from a year ago, to $957.3 million. Earnings per share also rose sharply, to $1.27 from $0.70.

The improved results helped propel the stock upward. Other catalysts have also helped, including the Fed’s huge stimulus package, announced last week. As well, the House of Representatives recently passed a bill aimed at making it more difficult for the government to support energy startups like former rival Solyndra, which went out of business after securing a $500-million loan from the Obama administration (though this bill is not likely to make it through the Democrat-controlled Senate).

The “No More Solyndras Act” is seen as a plus for established companies like First Solar, because it would make it harder for new competitors to enter the market.

Ongoing Uncertainty, High Short Interest Are Danger Signs

Despite the strong quarter, there remain some significant drawbacks to First Solar’s new business approach. For one, it puts it in direct competition with other electricity providers and cheaper power sources, such as natural gas and coal. Moreover, the final form the company will take after its transformation is complete remains uncertain. That’s one of the reasons for the stock’s high volatility, according to Cantor Fitzgerald analyst Dale Pfau:

“It’s difficult to ascertain what the value of the company is as it makes this transition,” he said in a recent MarketWatch.com article. “What does the company look like a couple years from now? That is what the market is struggling with. What is the earnings stream and what is the multiple (price-to-earnings ratio)?”

The stock’s volatility has, in turn, attracted a lot of interest from short sellers aiming to bet against a continued rise in the shares. Right now, 29.3 million of the company’s outstanding shares are shorted, up sharply from 18.7 million on December 30. (Short sellers sell stock that they don’t own in the hopes of buying it back for a much lower price at a later date.) The current figure also represents a high 33.7% of the company’s total shares outstanding.

Short interest is an indicator that’s worth paying attention to, even if you’re not a short seller, according to a recent article by Investing Daily’s Jim Fink. That’s because, in his view, the best short sellers are often hardened investors who have developed an ability to zero in on a stock’s hidden weaknesses. To back up his argument, Fink cites a 2004 MIT and Harvard study that found a clear relationship between stock performance and high short selling activity. The authors’ conclusion was unequivocal:

“An investor selecting stocks for a portfolio should avoid stocks with a high short interest ratio. If an investor already owns a stock that develops sustained high short interest, the clear and strong advice is to sell the stock immediately.”

Until the situation at First Solar—and in the entire solar power business—becomes clearer, most investors would be well-served by following that advice. To uncover a handful of top green energy stocks picks, click here.

Article originally posted here.