SolarCity: The Icarus Stock

Jun. 6.13 | About: SolarCity Corp. (SCTY)

In Greek mythology, Icarus, wearing wings fashioned from feathers held together with wax, flew too close to the sun. The wax melted and he plunged into the Aegean Sea…

I'm reminded of this story because of a particular stock: SolarCity Corp. (NASDAQ:SCTY).

Founded back in 2006, SolarCity went public last December, debuting at $8 per share. On May 20, it hit $51 - a 537% jump in less than six months.

That's an impressive performance by any standard. But if you're thinking about investing, you'd be better served to hold off, because it's about time for shares to come back to earth.

Indeed, this stock is too hot to touch right now, but it may be worth revisiting in a couple of weeks. Here's why…

Let the Sunshine In

SolarCity's business model is brilliant.

The company doesn't manufacture or sell solar panels. Instead, it offers homeowners the chance to have them installed on their homes free of charge.

There's just one stipulation.

SolarCity owns all the power generated from these panels for the life of the agreement - generally, about 20 years.

The company then sells the power the cells generate to the homeowner, with any excess electricity sold to utility companies.

That's why CEO Lyndon Rive describes SolarCity as more of a "distributed energy generation" company than a solar panel company.

The only difference is that instead of one enormous power plant, SolarCity creates thousands of tiny generators on roofs throughout a community.

Naturally, this business model - requiring solar panels, sales teams, and in-house installers - needs mountains of financing to pull off.

But that's not a problem for SolarCity, because its founder is billionaire investor and entrepreneur, Elon Musk.

If that name sounds familiar, it's because Musk is also the founder of PayPal and Tesla Motors (NASDAQ:TSLA). His name alone brings a lot of market clout. And it alone may be the key reason that Goldman Sachs (NYSE:GS) has jumped into the solar business by creating a $500 million fund to finance SolarCity's projects.

In fact, that one single deal with Goldman helped push SCTY shares from $34 to $53 in little more than one trading day.

So how do you play it?

Mark Your Calendar

Well, buying shares after such an epic run is risky - especially since a ton of restricted shares are likely to hit the market in the weeks ahead.

That is, with every IPO, there are a number of shares put under restriction. These usually are shares owned by insiders like board members, officers and employees.

Restricted shares cannot trade on the open market for a certain time after the IPO.

For SolarCity, that time restriction ends on June 11. That's when 60 million shares become eligible for secondary trading. After a ride like SCTY's, we're bound see a lot of profit taking. However, that could provide a great opportunity to pick up shares at bargain prices.

So keep an eye out and we'll keep you posted.

And "the chase" continues,

- Tim Diering

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.