Wednesday, June 22, 2011

Does Wall Street "hate" solar stocks?

I came across this article by the manager of the Green Alpha Fund - an environmentally focused mutual fund that is run out of the Sierra Club.   In full disclosure, I am a member of the Sierra Club and very supportive of much of their work, but this article seemed a little over the top.

The basic premise is that several solar power related stocks, such as LDK Solar, are being shorted irrationally by Wall Street firms that somehow "hate" solar power.  Without getting into a debate on whether or not LDK is fairly valued or not, it is worth noting a few things.

1. Short selling is a risky strategy - you are exposed to losses that can be potentially far greater than your gains.  You also have to pay to borrow the stock (in order to short), and thus you are constantly incurring losses if the stock just does nothing.  As a result, it is not that surprising to find that most of the evidence on short selling supports the idea that short sellers tend to be pretty informed.  These traders have a lot to loose and their positions are expensive to put on and as a result they tend to have done their homework.

2. To say someone has an "irrational hatred" of a stock because they short it, is quite frankly, stupid.  I am sure that short sellers as a group don't have any pathological desire to see solar power fail as an alternative energy source, they are just interested in making money on overpriced stocks.

3. The price level of solar stocks is not really a barometer of the viability of solar power.   In fact, it seems reasonable to think that specialty solar stocks may do poorly in the long run as the technology becomes more of a commodity and their competitive advantage gets eroded.  We've seen this happen in the LED lighting market.

4. If the Green Alpha Fund really thinks these shorts are irrational, then they should keep quiet and buy more solar stocks - they'll be proven right in the end (if they are correct).

Short sellers are frequently vilified in the press, by politicians, and by the management of shorted firms.  They are cast as some sort of unpatriotic group that is only interested in ruining everyone's fun.   In reality the evidence shows that markets that have active short sellers are priced much more efficiently and show less tendency to develop speculative bubbles.  In the end, short sellers are good for markets and that includes the market for solar stocks.