Dick Chanos: Short First Solar Stock $FSLR

Famousshort-seller Dick Chanos visited the CNBC set on April 14 and talkedabout his expanding list of targets that includes alternative energy,especially First Solar (FSLR). In response, the stock dropped 2.7% thatday and did not stabilize until the stock lost almost 10% over thecourse of a week. Directly ahead of another earnings announcement (May3), I think it is worth visiting Chanos’s list of charges against FSLR.

Chanos’s reasons to short solar stocks and First Solar in particular:

  • Austerity in Germany, Italy, and Spain
  • Solar cannot do baseload power – solar costs 3x coal and natural gas plants
  • Enormous insider selling – the chairman has gotten rid of most of his stock in the last year and a half
  • Lots of people are leaving (most of the executive suite)

Chanos says that the last two points create a pattern that short-sellers love.

At the risk of being the mouse squeaking at the lion, I will take some issue with Chanos’s thesis regarding First Solar:

  1. FSLR has laid out a long-term roadmap for reducing dependence on European demand and subsidized markets, first introduced in July, 2009. Moreover, in the last earnings call, FSLR indicated the company has the flexibility to sell 500MW in uncontracted volumes.
  2. FSLR is on a path to achieving grid parity in the next few years – 2014 in the Southwest USA. The current story on solar is not about completely replacing baseloadcoal and natural gas but instead becoming a bigger part of the mix asenergy needs increase.
  3. Insider sales have indeed been large since at least 2009, and this is one of the tougher issues for FSLR bulls to address. The chairman and former CEO Michael Ahearn, sold a large quantity of stocknear FSLR’s 2010 lows (in February) at the same time current CEO andanother officer BOUGHT shares. CEO Robert J. Gillette purchased$1.05M worth of shares at the time. Ahearn and First Solar neverexplained this sale of 1.5M shares, but they were not a signal of FSLR’s imminent demise.
    However, Ahearn launched an aggressive automatic sale program in March,2011 that sold stock almost every trading day of that month for a totalof 800K (including February 28). Ahearn got much better prices this time around, ranging from $140-155/share. No explanation has appeared forthese sales. However, ultimately, I would consider sales by the currentCEO to be a much bigger red flag. Until then, I consider him a major inside buyer who trumps other insider sales. Moreover, Ahearn is in a position where he has already become incredibly rich and, for all we know, he isgradually moving to protect his massive wealth.
  4. The latest executive departure at First Solar was Bruce Sohn, President of Operations. Since Sohn was not replaced, this move looks like an organizationalrealignment that perhaps Sohn lost. I would be more worried if Sohnleft, and FSLR was left scrambling for a replacement. Nevertheless,executive departures are only a net good if they occur to correct knownproblems. FSLR has not announced such a thing for any of the recentdepartures.

So, while I am not convinced by the case Chanos presents, I am alsonot pounding the table to buy FSLR ahead of earnings. We already knowthat most solar companies that have reported or guided this quarter have produced lackluster to disappointing results for their respectivecompanies and/or the general solar market (see LDK Solar, Evergreen Solar, ReneSola and SunPower). We have to assume FSLR will do the same or similar. Based on earlierpost-earnings reactions, we know it does not take much for sellers todescend upon FSLR in sight of the slightest blemish on FSLR’s results. I think such weakness will be another one of those ideal buyingopportunities that I look for in solar stocks.

Dick Chanos has plenty of company although shares sold short hasremained relatively steady for about five months after a quick ramp from 2010?s bottom in shares short. Today’s 16M shares short represents a whopping 33% of FSLR’s float.

Shares sold short in First Solar are high but down from the even higher levels in 2009

Shares sold short in First Solar are high but down from the even higher levels in 2009

Source: nasdaq.com

The chart below summarizes the current technical picture (snapshot from Monday morning). Note that in February FSLR exceeded my upside valuation range of $162, getting as high as $175 partially on the boost of a Goldman Sachs upgrade. My downside floor remains $105 with an anticipated trading range of $120-150.

FSLR has trended upward since last summer, but it has been a very rocky ride

FSLR has trended upward since last summer, but it has been a very rocky ride

*Chart created using TeleChart:

Be careful out there!

Full disclosure: long FSLR, ESLR, and LDK



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