It's pretty easy to tell when investors don't like a stock. They sell. And when investors really don't like a stock they sell its shares short.
A recent Business Insider article listed the 30 most heavily shorted companies by stock market traders. One theme stood out in the piece: investors really hate solar stocks these days. SolarCity (NASDAQ:SCTY.DL), SunPower (NASDAQ:SPWR), and SunEdison (NASDAQOTH:SUNEQ) all appeared on the list, each with more than 25% of shares sold short.
A new lease on solar
SolarCity is a full-service solar provider. It designs, finances, and installs solar panels on the rooftops of homes and business. The company's financing strategy makes it unique in the industry, as SolarCity has popularized the solar lease. For no up-front costs a homeowner can have solar panels installed on a house and lock in a lower energy bill for the next 20 years. This has revolutionized the solar industry, as customers no longer need to spend tens of thousands of dollars to buy the solar panels; instead they lease them from SolarCity for a low monthly payment. This strategy has sent SolarCity's shares up by more than 500% since the company went public at the end of 2012.
That surging stock price has investors worried, which is why nearly a third of SolarCity's shares have been sold short. Investors see the company trading at lofty multiples like 33 times sales and hate to think what might happen if sales growth cools. Furthermore, the company continues to lose money each quarter, with no end in sight.
That said, SolarCity expects to grow its customer base to 1 million by 2018. That lofty target would be a 70% annual growth rate. So, while many investors hate this solar stock, its future looks bright, suggesting that those short-sellers might be the ones getting scorched.
Scorching hot stock
SunPower has the largest installed base of solar panels in the United States. The company also leads in efficiency, as its latest panels are 44% more efficient than conventional panels. This has yielded surging sales in recent years, along with a spiking stock price: In just the last two years the price of shares has risen more than 700%.
Investors worry that the stock is running hot, which is why more than a quarter of SunPower shares have been sold short. However, this company has a bright future. SunPower estimates it has the potential to build more than 350 commercial and power plant projects in over 30 countries in the future. That represents eight gigawatts of capacity. While the company won't build all of those projects, its pipeline of future growth opportunities isn't dimming one bit.
Another sizzling stock
SunEdison is a global leader in the manufacture and sale of wafers and other materials used in the semiconductor and solar industries. Like its peers, the stock has been scorching hot -- up 885% in just the past two years. Investors worry they'll be burned if the stock cools off, which is why just over a quarter of its shares have been sold short.
The company, though, sees a massive addressable solar market, as noted on the following slide.
The addressable solar market is expected to grow about 13% annually through the end of the decade. Furthermore, it represents a $1 trillion in cumulative capital. That's a lot of money, especially when considering that even after its run over the past two years, SunEdison's stock value is just over $5 billion. That suggests the future of the company's stock could be brighter than investors think, as just a tiny sliver of those sales would move the needle.
Investors see the surging stock valuations of solar stocks and worry they'll be burned. That's why a quarter or more of the shares of these solar stocks are being sold short. I'd counter that these investors might be short-sighted, because the future of solar looks brighter than ever.