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Why Canadian Solar Stock Just Dropped 10%

By Rich Smith – Updated Sep 10, 2020 at 11:15AM

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Dilution rears its ugly head.

What happened

Shares of solar module maker Canadian Solar (CSIQ -1.16%) were down 9.6% at 10:40 a.m. EDT on Thursday, and the company has only itself to blame. After today's sell-off, the stock has given up every bit of gain it has accrued since GLJ Research initiated coverage of it with a buy rating two weeks ago.

So what

So what did Canadian Solar do to cause today's sell-off? Yesterday, after the close of trading, the company announced it will float $200 million worth of convertible senior notes due in 2025 (i.e., debt convertible into common stock).

Canadian Solar said it plans to use the money to fund "general corporate purposes, which may include the expansion of manufacturing capacity, development of solar power projects and working capital."

Chalkboard drawing of stock chart arrow going up being erased and pointing back down

Image source: Getty Images.

Now what

This was bad news because for one thing, another $200 million in debt pushes the company's already sizable debt load up past $2 billion. For another, the potential for this debt to convert to equity holds the prospect for Canadian Solar diluting its existing shareholders by nearly 11%.

But it need not be bad news if Canadian Solar uses the cash from its debt issuance to good effect, helping it to grow the business and capitalize on the "strong pipeline of orders" that GLJ told us last month that it has in hand. But for today at least, it appears investors are accentuating the negative.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Canadian Solar Stock Quote
Canadian Solar
$33.16 (-1.16%) $0.39

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