Seasoned investors in solar stocks and solar exchange-traded funds know a few things — and chief among them is the fact that tumbling oil prices are bad news for solar stocks.
Just do a chart comparison of the Guggenheim Solar ETF (TAN) and the United States Oil Fund (USO). USO, which tracks front-month West Texas intermediate futures, has plunged 38.8% year-to-date. TAN, the largest solar ETF, has lost more than 17%. Said another way, for every $1 shed by USO, TAN is bleeding more than 50 cents.
More troubling is the fact that the losses for solar stocks and TAN are accelerating. The marquee solar ETF is off more than 6% over the past month, meaning more than a third of its year-to-date loss has been accrued in just the past 30 days.
For adventurous, contrarian investors — and emphasis should be placed on “adventurous” and “contrarian” — TAN could be an attractive bet on the basis of rising short interest.
Short Interest and TAN’s Stocks
The $258.million-plus TAN ETF is home to 31 stocks, and among those solar stocks trading in the U.S., several frequently appear on most shorted lists. In plain English, professional traders love shorting solar stocks, and that phenomenon is not new.
That includes First Solar (FSLR), the largest U.S. solar company; Canadian Solar (CSIQ) and Elon Musk’s SolarCity (SCTY). That trio of heavily shorted solar stocks combines for over 21% of TAN’s weight, according to Guggenheim data.
TAN charges 0.7% per year, or $70 for every $10,000 invested.
“Currently constituents average 7.3% of shares outstanding on loan for TAN. This is around three times the average for companies in the S&P 500 and twice the short interest for constituents of the Russell 2000,” said financial data provider Markit in a recent research note.
So tantalizing do professional traders find solar stock to be from the short side that SolarCity, which is 5.7% of the solar ETF’s weight, has experienced an exponential rise in short interest. To be precise that solar stock, “has seen the largest increase in short interest over the past year of any solar company within TAN. Short interest as a percentage of shares outstanding rose by 46% year to date with 22.6% of total shares outstanding on loan,” according to Markit.
As an aside, traders really do not like Elon Musk’s stocks, because the next most shorted stock after SolarCity is Tesla (TSLA).
Tesla is not a member of TAN’s lineup.
Is the Squeeze On for Solar Stocks?
Knowing all this, it might seem as though TAN and the solar stocks it holds are primed for a short squeeze. After all, rising short interest in any security is seen as a contrarian indicator … but this is where things get dicey for traders mulling that theory with TAN and solar stocks. Data indicate that since Oct. 20, short interest in TAN has been surging, but since that date, the solar ETF has slid nearly 11%. The aforementioned USO is down more than 15% over the same period, further underscoring TAN’s ties to oil prices.
“Some analysts have indicated that that Solarcity is primed for a short squeeze, however Markit Research Signals’ short squeeze model does not agree. The short squeeze composite ranks highly shorted securities in on a scale of 1-100 with 1 being the highest potential for a squeeze and 100 being the lowest,” adds Markit.
Betting on a short squeeze as an upside catalyst for TAN and solar stocks is tricky because shorts are already deep in the money on these positions. You’re better off staying away.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
