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Solar stocks have gotten obliterated across the board in 2011. Fierce competition has resulted in a significant drop in average selling prices. That, along with the slashing of government subsidies in Europe, has reduced or eliminated profit margins for many solar companies. Of course, this has been great news for solar bears. Those who predicted this collapse and sold short have profited significantly.

Let’s look at the 10 most shorted solar stocks, based on the number of shares held short divided by total shares outstanding (float), along with the estimated number of days to cover:

Company

Ticker

Short Interest

% of Float

Day to Cover

(in millions of shares)

1. LDK Solar

LDK

37.28

27.1%

7.5

2. Energy Conversion Devices

ENER

14.23

26.7%

18.8

3. Trina Solar

TSL

16.59

23.1%

5.3

4. First Solar

FSLR

17.06

19.7%

8.3

5. GT Advanced Technologies

GTAT

24.57

19.4%

6.1

6. Suntech Power Holdings

STP

20.08

15.5%

6

7. Yingli Green Energy

YGE

16.33

14.8%

3.8

8. Canadian Solar

CSIQ

5.76

13.3%

7.9

9. SunPower Corp.

SPWRA

7.51

12.9%

14.7

10. Renesola Ltd.

SOL

7.52

8.6%

3.3

Source

The days to cover statistic is defined as the number of shares sold short divided by average daily volume.

As a reminder, short interest may be useful in judging investor sentiment for a particular stock from month to month, and as a comparison with other shorted stocks. This indicator is useful for both bears and bulls – bulls may consider a high short interest ratio a positive, since eventually there would be upward pressure on the stock’s price as short sellers cover their short positions. This upward pressure can become very strong if, for instance, a company announces some positive news and forces a number of short sellers to cover at the same time.

The graph below illustrates the dismal performance for the three most unfortunate stocks on the list above within the last 6 months:

Chart forTrina Solar Ltd. (NYSE:<a href='http://seekingalpha.com/symbol/tsl' title='Trina Solar Limited'>TSL</a>)

LDK Solar (LDK) is a Cayman Islands-based Chinese manufacturer of multi-crystalline solar wafers, and is trading at $3.40. The 52-week range is $3.34 - $15.10. LDK has earnings projections of about 52 cents for 2012. Last week, LDK announced that, in an effort to strengthen its balance sheet, it has repurchased $10.8 million nominal value of the company's 4.75% convertible senior notes due 2013, as well $10.7 million nominal value RMB $-settled 10% senior notes due 2014 in an open market purchase at below par values.

It is easy to see why LDK is a top priority for shorts. It had a terrible 2nd Quarter 2011 after reporting a loss of $0.62 per share loss and missing both earnings and revenue estimates by a wide margin. But even more importantly, what weighs heavily on the company’s shoulders are its total liabilities. This has been a problem for over a year now, and yet total liabilities have been increasing steadily and currently stand at approximately $5.7B or 81% of assets.

Energy Conversion Devices (NASDAQ:ENER) is trading at $0.76. The 52-week range is $0.56 - $5.38. ENER has earnings projections of about -$1.57 for 2012. This small-cap stock is more of a speculative play for any long investor, but almost a no-brainer for a short seller. The company has not been profitable for a long time, losing $0.84 per share during the June Quarter. In addition, analysts on average estimate that earnings will be in the red through June 2013, if of course it is still around by then…

Trina Solar (TSL) is trading at $7.38. The 52-week range is $7.03 - $31.89. TSL has earnings projections of about $1.86 for 2012. Now TSL in the top 3 list was a real surprise for me, based on the strength of the company relative to its peers. The stock has performed fairly well given the current conditions and has remained profitable so far this year. It has a forward P/E ratio of 3.9 and, like JA Solar and others, it is trading well below book value. The current stock price seems very attractive and future price performance may be boosted by potential covering of short positions.

The question now is: Are solar stocks near bottom, considering that many are re-testing 2008 lows while some have already gone bankrupt?

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TSL, JASO over the next 72 hours.

Source: Top 10 Most Shorted Solar Stocks