Opinion on  SOLR (SOLR)
SOLR

Wednesday, July 30, 2008

Dissecting a Dud
by Justice Litle, Editorial Director, Taipan Publishing Group

Justice Litle follows up with Cash McDash regarding the IPO debut of GT Solar International (SOLR), a stock market letdown, and why SOLR is still worth watching.

About two weeks ago, Cash McDash and I talked short opportunities and solar stocks. (You can see that piece here if you missed it .)

One of the companies Cash saw good things for was GT Solar International, a new issue set to debut with the ticker SOLR.

Cash was excited about the IPO, but he was also wary (as good traders often are). When we last talked on July 15, he urged readers not to jump the gun on SOLR as soon as it hit the Street, but instead to be patient and watch and wait. In our July 15th chat, he had this to say:

“[SOLR] should give us some great profits sometime this year, but it's also a dangerous stock to play without seeing the full picture... I'll get a better feel for how it will trade out of the gate once I get calls from all my contacts on the deal. Then we'll take that information and patiently watch for a place to pounce. I want to have an entry point that offers a great chance at serious profits, but limits risk, too. The key is to buy it at a time with the least amount of risk. It would be tragic to buy at the wrong time, get stopped out of the position, and then watch it sprint ahead to triple-digit gains without us.”

It was a good thing Cash was cautious... because investors who ignored his advice got burned. SOLR opened in the $16-$17 range and immediately fell lower.

I caught up again with Cash to get the postmortem, and to find out whether he still likes SOLR moving forward.

JL: Whew! That GT Solar (SOLR:NASDAQ) we last chatted about didnÂ’t look at all like what I expected. Nice opening and then -- whammo! -- an immediate tank. What happened?

CASH: Yeah. You couldnÂ’t have been half as disappointed as I was the way things went down. That deal fell out of the ugly tree and hit every branch on the way down. You could smell that thing on just about every street in Manhattan. ItÂ’s a good thing we advised caution to readers and didnÂ’t get trigger-happy. Patience is a virtue when it comes to making a good trade.

JL: True that. But in terms of the drop, what happened? Why such a poor performance? From our last chat , SOLR sounded very strong. Its business model and market niche and prospects are all good. So why the tank? Was it overall market conditions, or some last-minute piece of nasty news, or...?

CASH: This scenario is rare but not unbelievably rare. IÂ’d guess it happens about once a year. An IPO that should do very well ends up bucking conventional wisdom and trading sharply lower, devastating the companyÂ’s market value out of the gate. ThereÂ’s usually not a single issue that brings a stock like this down... With GT Solar there were a handful of short-term variables that all worked together to send the deal south.

JL: Gotcha. So for our education, can we take them one at a time?

CASH: Sure. First of all, there was some international news last week that sent shock waves through the solar industry. It seems that Spain (which happens to be the second-largest buyer of solar products) has released the planned solar subsidy budget for next year. As it turns out, the government will be dropping its subsidy by 70%... which is certainly a frustrating event.

JL: So does this spell doom for the solar energy market as we know it?

CASH: Oh heck no. Not at all! In fact, from a long-term perspective, it is probably a good thing for the subsidies to be rolling back. The government is pulling in its horns because the solar market is becoming strong enough to stand on its own. Technology continues to find more efficient ways to produce power, and the private sector is now picking up where subsidies left off. It now actually makes economic sense, from a cost-effective standpoint, to buy solar panels. Now that solar has crossed the tipping point of economic viability, the role of government subsidy is less needed.

JL: That makes sense. So in the long term, this is a sign of health and strength for solar... government scaling back means the private sector is stepping up and solar is becoming viable, part of the plan all along. But in the short term, the hot money sees nothing but the bad news headline on their Bloomberg terminal and reacts with a knee-jerk sell.

CASH: Exactly. The knee-jerkers are setting up a great opportunity in solar, in my opinion... It’s just a matter of being patient and waiting for it. This game is often about patience and waiting out the irrational response. Sometimes the knuckleheads drive you nuts -- the guys who pull the trigger without seeing the big picture -- but in the long run you gotta love ‘em because they create so many profitable opportunities with their short-sightedness.

JL: Makes sense to me. You said there were other factors, too, that added to the weak SOLR showing. Care to move on?

CASH: Sure. The second issue for SOLR was the underwriters. A big part of the underwriters’ responsibility is in finding “good” buyers. Meaning, an IPO like this should be placed with buyers who really want to own the stock and believe in the long-term prospects of the company. The underwriters have to do a good job of selling the story and finding truly motivated investors instead of “flippers.” It really hurts the short-term performance if they give IPO stock to people who are going to immediately turn around and sell the stock.

JL: But with the short-term uncertainty in the markets, and a lot of hedge fund desks feeling jittery over losses in other areas, IÂ’m guessing those kind of patient, committed investors were hard to find.

CASH: Yep. General conditions were extremely tough for this deal. Just look at what the Dow and the financials have been doing and you can see that. Times like these are when a firm like Credit Suisse (who was the lead underwriter) should have shown the discipline to postpone the offering. The IPO simply should not have been unveiled once the markets started getting slammed and the overall solar sector began heading downhill last week.

JL: And I’m further guessing that Credit Suisse didn’t show “discipline” because short-term cash is key to its bottom line. The investment banks are hurting enough as it is and need every penny of revenue they can get. If they step back and decide to postpone the GT Solar deal they miss out on millions in fees -- or at least push those fees into a future period. At this point in the game, they gotta have the dollars no matter what. Am I right?

CASH: Indeed you are. The fees take precedent, prudence takes a back seat, and the customers end up getting burned. Credit Suisse may have pulled in a nice fat commission for pushing SOLR instead of holding it back, but they burned their reputation in the process. They could have an extremely hard time getting their next deal done.

JL: Sounds like Credit Suisse totally dropped the ball on this one.

CASH: Yeah, you could certainly say that.

JL: So are those the two main issues? Or are there more variables we need to know about.

CASH: Well there’s one more shoe that fell the day after the IPO priced. It seems that LDK Solar (LDK:NYSE) , which is one of GT Solar’s largest customers for 2008, signed an agreement with one of GT’s competitors for a certain “furnace process” (don’t ask).

JL: And that was like pouring gasoline on an anxiety fire.

CASH: Right. The news that a big customer was inking a deal elsewhere caused SOLR to drop another 35% when the market opened Friday. Since investors were already thin on confidence -- due to the poor performance on Thursday -- FridayÂ’s news gave them every excuse to panic and bail. And bail they did!

JL: ItÂ’s pretty amazing to think that this name had that much volatility in just the first two days of trading. There is so much more to this game than just the fundamental story... so many key factors itÂ’s important to be aware of. So now we see whatÂ’s already happened... the question now is, what we do with all this information?

CASH: You sound like my old mentor -- the guy who took me in when I was greener than AstroTurf. I would walk into his office in my first year or two and explain a new theory I had on the markets... why a particular stock was acting a certain way and what not. He would listen politely, smile and nod, and then say “That’s all great, young Skywalker, but how do we make money from all this?”

JL: Always a great question to ask.

CASH: And hereÂ’s the answer: Readers should know that SOLR is not dead by any means. The contract it lost with LDK represents only about 8% of its backlog for 2009. The company has been active in diversifying its client base and should continue to make money. We may have a bit of a brownout in the short term, but the lights will be blazing over time.

JL: So youÂ’re still bullish -- just waiting for the right time to pull the trigger.

CASH: Right again. This kind of thing happens from time to time. ItÂ’s the whole reason for being cautious and picking spots. ItÂ’s also where a lot of the long-term profit comes from.

JL: You mean in terms of recognizing when a short-term lousy performance doesnÂ’t warrant throwing a stock in the garbage, and the chance to buy it proves a great opportunity later on.

CASH: Indeed. I imagine weÂ’ll chat more about GT Solar in the IPO Confidential service in the upcoming weeks. I certainly donÂ’t want to close my eyes and buy it blindly, but thereÂ’s a good chance the stock will set up for a strong move. When weÂ’re ready to pull the trigger and own this name, youÂ’ll definitely know...

JL: Sounds good.