David White

Solarfun Power: Classic Short Sqeeze Setup

You probably aren't paying attention to the 10+% growth rate in the Chinese economy lately. There is very little fraudulent about most of the Chinese companies. The labor is relatively cheap, and they work relatively hard. Many of their top scientists and engineers are U.S. or European trained. The Chinese solar stocks are much better values than most U.S. solars. Just compare the 2008 PE's to get a good picture. In hard times people look harder for value. They shop at Costco and Wallmart. They buy bargain Chinese solars as opposed to expensive U.S. solars.

This play is relatively simple. Some people bought convertible SOLF bonds when the market especially the solar market was going down. Since these are convertible into stock (i.e. when redeemed they will dilute shareholder value), they knew that this would tend to drive the price of the stock downward in a downward trending market. To ensure that they didn't lose a lot of their equity, many (if not most) then sold short the shares supplied to Morgan Stanley for this purpose. They felt safe in doing this because they knew that the extra shares flooding the market would drive the price of the stock down still further in a down trending market (a double whammy). They got further help from a miss in earnings by STP.
Now the situation has changed. LDK has reported a beat with a guide upward for Q1 2008. The price of SOLF stock is now a relative bargain at say 11 times 2008 earnings. The market has stabilized a small amount. The actions by the Fed and the Congress are having some effect. Some people are now unsure at least that the economy will fall apart (see Phillip Davis's article today on SeekingAlpha). The solar companies are global companies. The U.S. business is not even a large part of their business. Europe is a bigger customer. The Chinese economy is chugging along at a 10+% rate. The global business model, fast growth stocks with bargain basement valuations are positioned to go up in value. Examples would be the recent move up of such stocks as DRYS and TBSI. With oil prices very high, it is time for the bargain valued solar stocks to move up. The bond buying shorters will likely as a group decide to take their profits at this point. They will buy back their shorts as value buying kicks in. Combine the short covering with the value buying; and then SOLF should make quite a quick jump in price in the near term. If you buy the stock instead of options, it is a solid long term buy. You can be reasonably certain that you will be able to sell it for a profit in the not very distant future.