By Anthony J. Ogorek
The stock of SolarCity (SCTY) has taken a beating of late, declining by 70 percent over the past year. What does the market seem to know that our politicians are unwilling to discuss? Is its share price a temporary aberration, or a harbinger of potential bankruptcy down the road?
SolarCity is a speculative investment that by its nature carries a high level of risk of loss. Its recent stock price dive could be considered par for the course – much as the nearly 700 percent runup in price 14 months after it went public.
Not only is it promoting a replacement technology for fossil fuels, it is attempting to create a market for its product. Add in the fact that it is entirely dependent on governmental largesse and has a business plan that requires massive debt up front, and you can begin to see why the market is skeptical.
To give you an idea of how deep the market’s disbelief is in SolarCity’s prospects, let’s examine the number of its shares that trade, something called float. SolarCity’s float is 64 million shares. Investors can make money by betting that the share price will fall. This is called shorting a stock. The short interest or number of shares that investors have borrowed in anticipation of a falling share price is 24 million shares. This represents 37 percent of SolarCity’s float.
To put this figure into perspective, the NASDAQ exchange, on which SolarCity trades, consists of 2,500 stocks. The average short interest or bet against a stock is 5.5 percent of a stock’s float. SolarCity’s 37 percent short interest is the 17th highest bet against a company on the NASDAQ exchange, placing it in the top 1 percent of companies that investors are betting against.
This is an enormous wager by investors that this company’s stock will continue to decline. This is particularly ominous for a company that is heavily leveraged, is hemorrhaging cash and requires access to the credit and capital markets to survive.
Although SolarCity is the nation’s largest installer of rooftop solar systems, it remains an economic stepchild of government.
Gov. Andrew Cuomo can lease the $900 million factory to SolarCity for $1 per year, in exchange for the promise of jobs in our economically distressed community. Sen. Charles Schumer can work to extend the 30 percent federal tax credit for solar installations by another five years to give the company some breathing room.
What our governor and senator cannot control, however, are individual state-legislated net-metering arrangements that allow homeowners with solar systems to sell excess power to utilities at retail or higher rates. Nor are they able to control the financial markets that look at companies such as SolarCity with a wary eye.
Anthony J. Ogorek is founder and chief investment officer of Ogorek Wealth Management in Williamsville.