Monday, August 11, 2008

Another Sucker's Rally?


Todd Harrison, founder of Minyanville, was interviewed by Henry Blodget on Tech Ticker this morning, discussing the latest rally in stocks (click here to see the interview).

According to Mr. Harrison, the best tactic for an investor with a shorter-term horizon is to manage risk. For him, that means staying away from financials and using stop losses to limit your losses. He is now focusing on the high beta tech names like Google, RIMM, Baidu, and Apple which he feels will benefit from margin upside. He also feels that fund managers will be chasing these stocks as performance angst sets in this quarter.

I am also looking at high beta stocks but focusing my attention on the solar sector. LDK Solar (LDK) announced its earnings after the close today and it blew past earnings estimates, sending its shares up 20% in after-hours trading.

The last few weeks have been tough for the solar sector. Yingli Green Energy Holdings (YGE) also blew past earnings estimates but its shares slid over 20% since this announcement to reach yearly lows. Solarfun Power Holdings (SOLF), another great company, is also flirting with 52-week lows despite the fact that many traders expect it to blow past earnings when they announce on August 27th.

So what explains the recent slide in the solar sector? Part of the reason is the drop in oil prices but the fundamentals do not warrant this overreaction. Another reason is that hedge funds love manipulating these stocks, sending shares up and down like a yo-yo. Interestingly, while the SEC has prohibited naked short selling in financials, it has not stopped this practice in the rest of the market, allowing hedge funds and their brokers to manipulate shares in some sectors.

Nonetheless, the latest earnings from LDK will ignite a fire in the solar sector tomorrow and I expect many good companies like Solarfun, Yingli and others will rise as hedge funds cover their short positions.

But as far as the broad market is concerned, as long as the major stock indexes remain below their 50 and 200 day exponential moving averages, you can be sure that this is just another sucker's rally.

Update (12-08-08): This morning JA Solar Holdings (JASO) reported their quarterly results and they were outstanding. Quarterly revenues increased 171% compared to Q2 2007 and they reiterated their positive outlook for 2009.

Canada's Timminco (TIM.TO) also reported second quarter results but the stock got slammed because of higher than expected losses due to a reorganization charge related to the closure of the Company's Haley, Ontario manufacturing facility under its Magnesium Group. Timminco shares are down 24% today but keep in mind that this company supplies solar grade silicon to some of the world's leading solar panel makers, including Q-CELLS (QCE.DE) in Germany. I see the current weakness as a buying opportunity once shares stabilize (do not rush to buy now; it is better to wait a little and pay up once it starts heading up again).

Tomorrow, Canadian Solar Inc. (CSIQ) is reporting its earnings. By the looks of things traders are expecting another outstanding earnings report. The stock is up 15% today.

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