ReneSola Ltd. (ADR) (SOL) is not for the faint of heart. Since its $13.00 IPO in March the stock has seen a low of $7.36 and a high of $29.48. That accounts for a 300% gain if one was lucky enough to buy at the very bottom and sell at the very top. Since its high in May, the stock has taken back nearly half of its gains and a great bit of the decline occurred on Thursday’s trading. Many traders were likely hard pressed to find a reason for the significant decline on volume, but the primary reason actually stems from an announcement made May 30th of this year.
At the end of last month, the company along with several key shareholders, filed to sell about 8.15 million ADSs to the public. The majority of that stock was being sold by the company which at the time stated its intent to use the $70 million expected from the sale to purchase additional equipment and fund production as it expands manufacturing capacity. The interesting question readers may be asking is “so why didn’t the stock drop on May 30th?”
The answer is that at the time of the filing, the market was still trading relatively firmly and since there was no immediacy to the offering, investors were more willing to look at the growth prospects of the company than the dilution they would endure through the company selling additional shares. As the market weakened, the stock began to decline as was to be expected, but Thursday the stock fell sharply in volume with the overall market as well as the majority of the company’s solar peers actually posting a small gain.
To give you a picture of what a fund manager’s day can look like, Thursday afternoon I was at my desk scouring the news wires to try to figure out why SOL was quickly dropping when my phone rang. The call happened to be from a particular contact of mine from Oppenheimer which is one of the companies that has been hired to underwrite the deal (or sell shares to the public). So now it becomes perfectly clear! The stock is under pressure because it appears management is going to go through with the offering even though the price is much lower. This causes the dilution effect to be even greater, and many managers may sell or short the stock in advance of expecting to receive an allocation when the secondary is actually priced. This is where having an ear to the professional share flow comes in handy because many retail investors may still be unaware that the deal is soon to price.
ReneSola is still one of my favorite solar names and despite the additional shares coming to market I believe the stock is a good value at this price. However, you will not find me buying the stock until one of two things happen. Either the stock must begin to turn up and show strength in front of the dilution, or the deal must price and the stock must hold above the deal price. If either of these scenarios occurs, the fundamental backdrop will make me interested in purchasing. But until that point in time, the bears have the ball and its best to sit back and play defense.
FD: Author does not have a position in SOL
Additional Reading:
Tech Trader Daily on Chip Stocks
6/23 Tech Trader Daily on Japan’s Solar Initiatives
ReneSola Ltd. (ADR) (SOL) – Secondary Offering Pressures Shares Wicked Tickets
June 13th, 2008 at 6:58 am
Hi zack,
Nice post.
how the price of the secondary will be determined? Is it a bidding or Does it based on the primary price on a particular day or something else.
Thank
Srikant
June 13th, 2008 at 8:11 am
Hello Srikant,
Typically a secondary offering price depends on how much demand the underwriters can drum up. About half of the time, a secondary will price at the previous day’s closing price. But if it is becoming harder to find enough firms to take the stock, the price will then be set at a discount to the close (sometimes a significant discount). All buyers get the same price and it is really up to the underwriters to set the final offer price.
Thanks for the question – maybe at some point I should do a post about the mechanics of an IPO offering or a secondary offering.
ZDS
June 13th, 2008 at 3:17 pm
zach, would you consider updating google ?
June 14th, 2008 at 8:52 am
Very nice article. But SOL (Renesola) is the immediate play monday, June 16, 2008 for the better yet similar solar situation explained in the above excellent article. Research SOL, and you will see it is now done with its temporary no reason pullback by US traders, while under accumulation that is picking up by asian institutions/traders (and perhaps europeans, see each evening on the London exchange, it picks up significantly while the US drops the stock the next day). The now old news of SOL ADS’s issued is a normal thing when needing immediate capital to purchase equipment needed to build up supply. The demand for SOL products is now huge, and SOL’s profit growth has been exponential the last 3 quarters. PE is only 18, and IBD (Investor’s business daily) lists SOL as the 4th best company in the world to invest in. SOL’s temporary short duration pullback is now over, and current analysts still suggest at least a $40 share price perhaps by late summer, or fall. Asians know SOL as a well known product, and solar panels are appearing all over asian towns and cities on street light posts, etc. Not so with americans and impatient US investors who were previously changing hands with SOL shares, while large Hong Kong, Tiwanese and other asian investors (and likely europeans) were then and now quickly picking up well known headline making SOL shares. Soon the stock will return and go beyond its $29 high, but the shares then be mostly owned throughout asia. The continued asian accumulation will pick up more… excellent opportunity. Compare SOL with other solar plays. Most other solars have no PE (ie., no real profit, or the PE is very high, ie., 50 to 205). SOL with exponential growing profit and only a PE of 18 today, is an unusal immediate opportunity. Study it, and read todays news on SOL.