Buy LDK Solar's Panic Selling Drop

Never before have I gotten such a rude shock in my short investing career. Last Wednesday, I noticed that solar wafer maker LDK Solar(LDK) was trading down 10% on no news. I have been following this company for a while now and realized that its growth prospects are immense, and a 10% drop was be the perfect opportunity to buy a few shares.

I bought at $62, and I thought I was doing well when I saw the stock at $65+. By the time I came back from a late lunch, I saw the stock tumble 20% to the 50s, on a Piper Jaffray report that a former financial controller had raised doubts about the company's inventories.

I could not believe my ill-luck. The day that I bought the stock, it had to take a hit. Since then the stock has only been going down each and every day, with no hope in sight. The company's CFO has come out and issued positive statements saying that a former employee, Charley Situ, was leveling baseless accusations, and that a third-party audit had been ordered. He also said that Situ was not taking into consideration a lot of scrap silicon, which the company considers to be very much a part of inventory.

However, there seems to be no end to the carnage. The stock is now trading at $37, half of what it was 4 trading sessions back.

My take is that this is utter over-reaction. The stock is taking such a big hit primarily because the company is on the other side of the world in China, and that just makes things a lot more uncertain. I bought some more shares at $45, but even that proved to be a foolish decision.

To make it worse, Barrons came out with an article on the weekend telling everyone what they already knew, but just made it sound a lot worse. I personally believe that the company has been doing things right, and will come out clean in the third-party audit. Unfortunately, the stock might never return to the earlier levels, and there will be a cloud of doubt over the press release from the company.

I believe this is the perfect opportunity for a buy. If the company was really into any kind of fraud, they would not order an independent audit, and their CFO would not issue statements to the press, which can lead to his imprisonment if proved wrong. Though it will take some time for the doubts to clear, once the company declares its quarterly revenues, which the CFO says will double year-over-year, the euphoria should be back.

I will add to my position on any weakness from here. I am investing in this company, based on my faith in the management and I just hope they don't deceive their shareholders. I also think a 50% drop in share price on the basis of a rumor spread by a disgruntled, fired employee is sheer over-reaction. Good luck on your trade.

Disclosure: Author has a long position in LDK

Comments

[erniem:]

ever hear of a really good stock called Worldcom?

2007 Oct 10 11:04 AM

[Prashanth C...:]

Hey Ernie
Thanks for the humor. It does help to be funny in today's world. On a serious note howeverm it's both inaccurate and premature to compare LDK with WorldCom.

LDK listed its stock only on the NYSE, knowing very well how strict the regulations are here. They could have easily listed it in China and kept fudging their books, thanks to the poor regulations there.

Think about it: having gone public just three months back, would they really risk the future of the company by doing something like this?

And who do you believe more, the company's CFO and CEO, or a guy who was fired ? Would you say nice things about a company that fired you?

2007 Oct 10 02:32 PM

[Vince Sanchez:]

I got LDk at $55 and didn't sell at $74 in just a few days, I know the sector and I am sure about the shortage of silicon in the global solar PV modules.
This company came in the right moment and will exhibit good numbers soon.
The drop in stock value is just an over-reaction, with no real justification. I hold this value and hope it will recover in a few days.

2007 Oct 10 10:12 PM

[roblites:]

I learned about the situation from a web site I subscibe to(free):
asensio.com . These people appear to be very thorough and perhaps broke the story.

2007 Oct 11 08:22 AM

[in4thelonghaul:]

I don't now, nor ever have I held a position in this company. I have to admit, that I am tempted to go long on Monday, depending first on how the market reacts to the Barron's piece.

You make a revealing statement in your write-up: "I will add to my position on any weakness from here. I am investing in this company based on my 'faith' in management, I just 'hope' they don't deceive their shareholders."

You express "faith" in a mngt. you don't actually know (apparently)..and you express uncertainty by your use of the word "hope".

You seem to reason (somewhat logically) that mngt.'s immediate promise of an 'independent' audit, and the CFO's assurances are indicative of the accuracy of the company's version or position...since the CFO is exposing himself to possible legal entanglements if he is lying.

Yet I would point out that Mr. Situ must be as aware of the potential legal penalties which may await him were his charges proven to be false....and possibly even if they are true.

I suspect it is a rare occurrence where someone making false accusations bothers to send copious documentation to the SEC and other outlets.

I suspect the "truth" lies somewhere in the middle.

My guess is that yes indeed...LDK's mngt. tried to play 'fast and loose' with the 'scrap' inventory...this is simply deceptive when not revealed upfront (at least in footnotes). My suspicion is that such loose interpretation of the facts is more common among Chinese firms than American firms (simple supposition on my part from various stories I have heard and read over the years).

The real question is - if true...if mngt. was using a bit of 'fuzzy' math, if they were painting an unjustifiably rosy picture...how inaccurate were they?? Does the 'truth' justify a 40/50 % haircut? Is LDK a screaming buy now, or will further revelations cut the sh/pr further...and by how much?

One thing is certain...a cloud now hangs over LDK mngt. Their decision to (apparently) be less than absolutely transparent in their reportings has left a stain of doubt as to how credible other figures might be as well.

I don't pretend to be able to discern with certainty whether there is any serious malfeasance here...or simply an honest misunderstanding, or acceptable difference of opinion.

My plan is to wait for the market's reaction on Monday to the Barron's piece and then go long...but not very long. Only a fool or an aggressive speculator in search of riches, rushes into a cloud of smoke assuming the reports of fire are mere poppycock.

Of course, there are a lot of very rich individuals, who have achieved that status by aggressive speculation.

2007 Oct 13 03:23 PM

[Prashanth C...:]

There's some rules I follow, cdpayne:

1. If fundamentals havent changed, your trade should not change. Holds perfectly in this case.

2. When others are fearful, be greedy. After a drop of 50% on just claims, I wonder how much more down it will go.

3. For longs, there's a common rule that says buy on rumor sell on news. The same applies here. The shorts have shorted mercilessly on the rumor, and will cover when the news comes out with the company dismissing claims.

2007 Oct 30 03:54 PM

[paul b:]

Thanks for this article. I went on to take a modest stake, and held through the storm for some rewards. Be well. - paul

2007 Dec 18 09:34 AM