SolarCity Corp: A Solid Long-Term Bet to Squeeze the Shorts (SCTY)

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SolarCity Corp (SCTY) is getting crushed this year with an ugly earnings report and guidance cut only making matters worse recently, but at least one analyst says the beat down has set SCTY up for a short squeeze.

SolarCity Corp: A Solid Long-Term Bet to Squeeze the Shorts (SCTY)Depending on the time frame you choose, solar stocks have been a miserable place to be for the past year some time. Using the Guggenheim Solar ETF (TAN) as a proxy, the sector is down 32% for the year-to-date and by more than half over the last 52 weeks.

SCTY stock sure isn’t helping. It’s guilty of weighing heavily on results with some very wide underperformance. SCTY stock has lost 60% this year so far and nearly 68% over the last 52 weeks. Many multi-year time frames are likewise icky.

But the bottom — on a near-term basis — might have been found. SCTY crumbled after it reported a wider-than-expected quarterly loss a little more than a week ago. Management also took a scythe to its outlook.

Demand for Solar City’s products and services was well understood to be slowing in the U.S. Low prices for oil and natural gas are not its friends. But the damage being done by macroeconomic forces turned out to be even worse than feared.

And then a funny thing happened. After dipping below $16 a share in intraday trading early this month, SCTY began a sneaky good run. Shares are up almost 11% since the post-earnings collapse and now a Raymond James analyst says they’re poised for even bigger gains.

A Short Squeeze in SCTY Stock?

Analyst Pavel Molchanov, who maintains a “strong buy” rating on the stock, is “convinced that the stock is oversold and ripe for a bounce/short squeeze.” From his note to clients, via Barron’s, Molchanov identifies three “myths” that are pushing SCTY stock down to unreasonable levels:

  • Myth No. 1 – PV Demand Is Slowing: “One version of the argument claims the market is saturated, even though the percentage of U.S. households with rooftop PV is merely 1%…we see no evidence of saturation. The second argument is that utilities are successfully blocking rooftop PV, forcing installers to spend even more on customer acquisition. There is some truth here, since utilities are routinely fighting rearguard actions on net metering – but they have lost the bulk of these fights.”
  • Myth No. 2 – Financing Is a Struggle: “SolarCity has had no problem raising all the project-level capital it needs. Despite a high-yield landscape that has clearly seen better days, SolarCity successfully priced two securitizations year-to-date. Although the yields are higher than a year earlier, reflecting high-yield softness, the deals got done.”
  • Myth No. 3 – Unrealistic Discount Rate: “The last securitization was done at 6.25%, and the Hancock deal at 8%. Looking at these two data points, you could conclude that 6% is too low.”

SCTY CHART
Click to Enlarge 
On a technical basis, SCTY is indeed deeply oversold. Just look at the RSI and MACD in the accompanying chart.

Molchanov makes a strong bull case on a fundamental basis and has some technicals on his side. By these measures, SCTY stock looks good as a trade or a long-term investment.

Unfortunately, the only certainty in between the two is more excessive volatility.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/solarcity-scty-stock-short-squeeze/.

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