Tuesday, August 16, 2011

Evergreen Solar Bites The Dust, Hoku Could be Next

Evergreen Solar (NASDAQ: ESLR) filed for bankruptcy Monday -- back in May I suggested you could profit by selling its shares short. If you had done that, you could earn a 683% return if you close out your position this morning. Are there other solar companies that could follow Evergreen?

Evergreen makes little panels -- called photovoltaic cells (PVCs) -- that convert sunlight into electricity. As I wrote in May, Evergreen got money from Massachusetts to manufacture there but shuttered that plant and shifted production to China because of plunging PVC prices. I suggested that at $1.41 a share, investors could profit by betting on an Evergreen Chapter 11 filing.

The way to do that would have been to borrow the shares from a broker and sell them on the open market -- with the hope of repaying the stock loan at a lower price in the future. If you had taken my advice on 10,000 shares, that would have given you proceeds of $14,100 on May 13 when that post was published -- stored in the broker's escrow account.

To get your hands on that cash, you would need to repay the loan of those 10,000 shares. If you did that at today's price of $0.18, you would shell out $1,800 netting you a profit of $12,300 -- almost seven times your investment in three months (excluding transaction costs).

The forces that sent Evergreen into bankruptcy are affecting other companies as well. Of these, two are worth looking at as possible short candidates:

Ascent Solar (NASDAQ: ASTI) a $100 million market capitalization PVC module maker. At $1.88, I'd give a short on Ascent shares a 40% chance of being a profitable.

Without outside help, it looks like it will run out of money by the end of the year. How so? It had about $10 million in cash at the end of June 2011, posted an $85 million loss for the first half of the year and is required to repay $14.5 million in debt by the end of the year. However, that loss included a $78 million impairment charge for shutting down its PV modules business -- a more normal loss would be $7.6 million a quarter.

The good news is that on August 12, Ascent got a $7.4 million investment from TFG Radiant -- an investment group. TFG has also "made a commitment to invest $165 million to build" a plant  in East Asia using Ascent's technology for making so-called CIGS PV.

If TFG actually provides the money needed to turn this plant into a profitable operation, Ascent could stave off bankruptcy. Otherwise, it could run out of money soon.

Hoku (NASDAQ: HOKU) a $103 market capitalization maker of solar products. At $1.88,  I'd give Hoku shares a 60% chance of plunging.

It appears to be on a glide path to running out of money within a year. It has $17.8 million in cash and lost $10.2 million both in the quarter ending June 2011. If it continues losing money at this rate, it will run out of cash by the end of 2011. But the problem facing Hoku is that it must repay $54.5 million in debt within the next year.

The key to its survival is an agreement it has with Tianwei, Hoku's majority shareholder that "has committed to provide the Company financial support for its ongoing operations, planned capital expenditures and debt service requirements until at least April 1, 2012." It also appears as though Tianwei will provide emergency funds -- so-called "standby letters of credit" worth $243 million at June 30, 2011 "as collateral for the Company‚Äôs third party debt."

My conclusion is that these companies are unable to operate as stand-alone entities but thanks to deep pocket investors, they could stay afloat. To profit from a short bet, you would need to be certain that these investors were about to pull the plug.

Neither of these short bets is a slam dunk -- if you missed out on the Evergreen Solar short, you should keep a close eye on these two.

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