Chinese photovoltaic product manufacturer JinkoSolar (NYSE:JKS) has earned a spot on many traders’ watch lists in 2020. That’s because the JKS stock price has catapulted in September and October so far, practically tripling in a matter of weeks.
Don’t be surprised, therefore, if you see a slew of big-bank analysts suddenly raising their price targets on JKS stock. This doesn’t necessarily mean that JKS is a buy now.
In reality, it’s mostly a function of analysts having to keep their price objectives in line with the new share price.
Please don’t get the wrong impression. I’m not saying that anyone should bet against JKS stock. As an up-and-coming Chinese solar manufacturer, JinkoSolar has strong growth prospects.
Therefore, I’ll leave the short side of the trade to bolder traders than I, such as InvestorPlace contributor Tim Biggam, who proposed selling a short-term bear call spread on JKS stock. Instead, I’ll advise a wait-in-the-wings strategy as a pullback seems inevitable but I dare not attempt to time it.
A Closer Look at JKS Stock
While I’m not prepared to recommend a short-side trade, I tend to concur with Biggam’s assessment of the run-up in JKS stock.
As he explained, “the rally has now come too far, too fast. It is time for a red-hot JKS stock to cool off.” And even the uber-bulls have to admit that JKS has practically gone vertical in recent weeks.
Consider the fact that JKS stock went absolutely nowhere from late 2016 to April of this year. Sure, there were some buy-able dips along the way. Yet, long-term stockholders were undoubtedly disappointed with the sideways multi-year move in JKS shares.
All of this changed dramatically in September. Within the span of a few trading sessions, JKS stock leaped from the $20 region to more than $60. Astonishingly, on Oct. 9, the JKS share price tacked on 14.34% and closed at $62.84. What could have caused a rally of this magnitude?
A Shining Quarter
JinkoSolar, the world’s biggest solar panel producer, absolutely crushed it in the company’s second-quarter earnings release. I’ll step back and let the numbers do the talking here:
- Quarterly earnings per share of 93 cents more than doubled Wall Street’s expectation of 40 cents
- $1.12 billion in revenues beat the consensus estimate of $1.07 billion
- 4,469 megawatts of total solar panel module shipments, up 32% on a year-over-year basis
- $969.6 million million in cash and cash equivalents at the end of the second quarter, a substantial improvement from the $557.5 million held as of March 31
As you can see, this solar panel maker had plenty of shine during its most recently reported quarter. But would this, by itself, be sufficient to justify the wild price surge in JKS stock?
The Shorts Get Squeezed
Yes, it’s incontrovertible that JinkoSolar has an outstanding second quarter. But then, it could be argued that the markets are efficient and all of this great news has already been priced into JKS stock.
Besides, there’s probably a massive short squeeze in progress. As InvestorPlace contributor Larry Ramer skillfully explained.
“The ‘smart money’– including the huge investment banks Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC), and Citi (NYSE:C) — have been accumulating JinkoSolar’s shares for a couple of years,” Ramer wrote.
On the other side of that trade, observes Ramer, short sellers “had routinely accounted for around 50% of the stock’s daily trading volume” for a number of years.
With JinkoSolar’s blockbuster second-quarter earnings report, the long-side investors had a great excuse to wrest control from the short sellers. This probably explains the explosive magnitude of the move in JKS stock.
And that’s why I’m advising caution at this critical juncture. Short squeezes can end just as abruptly as they began. Unless you’re a masterfully nimble trader, I recommend staying on the sidelines and waiting for a lower price before buying shares of JKS stock.
The Bottom Line
Ramer’s explanation of the short squeeze in JKS stock makes perfect sense to me. It helps to explain how the stock price could literally triple in a matter of days.
After a move like that, I believe that most investors should step away because a massive short squeeze could end at any moment. Nevertheless, JinkoSolar is clearly a profitable company and a pullback in JKS stock could provide an ideal long-side entry point.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.