How to tell when the solar bubble will burst

By Howard Lindzon
Globe Investor Magazine Online, January 15, 2008

Howard Lindzon is a Canadian hedge fund manager based in Phoenix, Arizona. He also is the founder of wallstrip.com, a video website about momentum stocks.

I received this email question a few weeks ago about First Solar Inc. (FSLR/Nasdaq). The stock was the hottest of the hot solar stocks, trading as high as $280 (U.S.). It has since fallen about $50.

"It seems obvious to me that First Solar is a screaming short, even if oil goes to $125 a barrel, which it probably will. So, since it seems obvious to me and I'm no expert, why the hell is First Solar still so damn expensive? Do people just buy FSLR every time oil goes up?"

This is what I blogged in response:

Stock prices are a combination of supply, demand, mood, perception and actual financials.

Yes, the email writer could have made money on that short. Even today, the forward price to earnings ratio on First Solar is almost 200 times.

But the problem with shorting a hot name is that you can go broke being right. The stock could just as easily go from an overvalued amount of $280 to $1,000 before it stops and reverses. With solar stocks today, there is not nearly enough supply of stock and the mood has been completely giddy.

Investors are in love with the sector and there are probably only 10 legitimate public companies in the space globally now. Supply of the stocks is so limited that just a few big mutual funds could actually own the whole solar float of available public shares.

Some day First Solar and the rest of the solar gang will make great shorts, but not until more shares are available. That could be $100 and 12 months from here on First Solar for all I or anybody knows.

And don't worry. When the bubble bursts, there will be plenty of time to make money on the short side. The homebuilders were great shorts when they were down 50 per cent from their all-time highs. Hey, they were good shorts down 70 per cent.

Wall Street will inevitably go about its job of creating supply to satiate the solar stock demand from institutions and the public. It seems to me that we are still rather early in the solar energy trend. The current leaders are proving that there is demand.  The industry had been long on hype and short on real business until the last couple of years. You can bet that Wall Street will work its distribution magic once again.

The current solar leaders include:

FSLR - First Solar
STP - SunTech Power Holdings Co.
JASO - JA Solar Holdings Co.
CY - Cypress Semiconductor Corp.
The second tier 'high fliers' include:
CSIQ - Canadian Solar Inc.
AKNS - Akeena Solar Inc.
CSUN - China Sunergy Co.
Disclosure - I'm long FSLR, CSIQ, AKNS and CSUN.

Special to The Globe and Mail