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Be Careful, Be Very Careful of Optimism on First Solar

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First Solar (FSLR) is back!

The beleaguered US solar company is proving skeptics wrong, according to Marketwatch, and is ready to beat its Chinese rivals, according to Bloomberg.

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The only problem with its so-called turnaround and competitiveness with Chinese rivals is, well, nothing has changed. Remember, First Solar was one of the stock market's most spectacular crashes in history. What follows are arguments against the bull case for First Solar.

First Solar Shares Are Up 60% in the Past Three Months!

To heck with you skeptics.

Of course, First Solar's shares are down 75% in the past year! Folks, this is what you call a junk rally in a massively destroyed -- and shorted -- stock. You see it occasionally in shares of Green Mountain Coffee Roasters (GMCR) and coal stocks like Alpha Natural Resources (ANR). Such companies have good days because they've had so many bad days.

As of the end of August, short interest in First Solar was still more than 50% of shares outstanding, and that is going to affect trading when the company announces a new project award here and there. Let's not also forget that with all the major equity indices testing multi-year (or even pre-financial crisis) highs recently, it's a time when investors turn to "junk" stocks because everything else is pushing the limits of reasonable valuation.

Even when First Solar was at the lowest of lows of $11.43, there was a case to be made that the company was transforming itself into an engineering, procurement and construction company of large-scale solar utility projects around the world. As I wrote long, long ago in a solar galaxy far, far away from today, if it works, slap a utility-industry-like multiple on First Solar shares and you've got a stock worth somewhere between $20 and $40. So I wouldn't get too excited about a rally all the way to $22.

Another thing to consider is that First Solar has always been one of the market's favorite "toys" -- hedge funds and chart traders like to play with the stock. It used to be a matter of trading all the way up to $180 before heading all the way down to $100 -- ah, the salad years of solar -- and it hasn't found its new trading range as a market pawn yet, so the latest rally all the way $22 is just part of that process.

The Chinese Can't Compete Because They Are Stuck in the Disastrous Manufacturing Complex.

What do you think First Solar was doing for all those years buying up billions of dollars in project pipelines while giving rebates on its panel prices to customers as the Chinese cut into its cost advantage? Selling to the merchant market was a long time coming, so it's not as if the case it's making today is a new one.

This is a chicken-or-egg scenario. Has First Solar been forced to make its case about project business growth because the Chinese destroyed it in the manufacturing game (while destroying themselves, at least for the moment, mind you)? Or did First Solar see the future before anyone else in the industry and secure its long-term advantage?

A quote like this from First Solar CEO James Hughes to Bloomberg should be disregarded by investors: "We're still far ahead of them. We'll keep our distance and potentially expand it." First Solar is far ahead because it has the legacy pipeline of projects acquired in prior years, but the critical question is whether it can replicate that model globally and do so as the Chinese catch up.

We have really come no closer to answering this question, and the situation hasn't become any clearer because First Solar sells a few more projects in the US. After all, company founder Michael Ahearn said on a recent conference call during his return as interim CEO that project growth in the US will stall in the next few years.

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