While the overall stock market has suffered heavily this week, solar stocks have performed well. The rationale for solar's valiant outperformance has been fairly clear:
- Concerns over the future of nuclear have turned eyes towards the solar option for utility power generation.
- This is particularly true for Japan since additional power generation will have to be built out fast to replace the damaged nuclear plants at Fukushima - and solar is likely to play a role, particularly as construction times are relatively short for solar.
- Japanese householders are likely to turn to residential solar as part of a move towards ensuring future household 'power security'. This could be a major factor.
In the aftermath of the tragic developments in Japan, I published an article suggesting that US solar player SunPower (SPWRA) would likely be a particular beneficiary of a move towards solar amongst Japanese households - via the company's agreement with Toshiba (OTCPK:TOSBF) to provide modules for their residential solar program.
Since the rally in solar has indeed started to play out, and given the fact that the concerns over the future role of nuclear has been such a shock to the system, it is worth asking to what extent there is room for a significant further short squeeze.
The table below helps throw some interesting light on this issue:
|Market Cap ($bn)||Short Interest as a Percent of Shares Outstanding|
|Yingli Green Energy||(NYSE:YGE)||1.82||6.5%|
|MEMC Electronic Materials||(WFR)||2.87||3.9%|
What is clear is that there are indeed some sizable shorts in the solar market. These positions may have been taken down to some extent during the course of the last few days. However, it is also clear that the events at the Fukushima nuclear plants will have been a shock to expectations - precisely the kind of event likely to lead to a sharp unwinding of short positions that had not envisaged such a change in the environment surrounding the industry.
It is also true that the shorts are by no means uniform. The short position against SunPower is the most significant at 27%, followed by First Solar at 17%. There is of course no exact science to this. However, in my own opinion, anything over 10 to 15% is dangerous for the short community in this type of environment.
From that point of view, the table also indicates that many of the Chinese solar players have very limited short interest and are much less likely to see a short squeeze. However, amongst these players, JA Solar and LDK at least seem to have the potential for such a move.
Finally, Power-One provides inverters for the solar industry and is interesting since it had short interest at 33.2% of shares outstanding according to the latest data.
These short positions, of course, certainly do not guarantee a rally. However, given the shock to expectations presented by the events in Japan, they do point to a favorable balance of risk-reward.
Disclosure: I am long SPWRA.