SolarCity's Manipulative Rally Is About to Die

SolarCity (SCTY) has rallied strongly in the last few weeks. As a long-term SolarCity bear, I find the rally unjustifiable. However, SolarCity has crashed massively after releasing its earnings over the last two quarters, and I expect the same to happen again when the company reports earnings next month.

Shorting SolarCity is expensive

I am very bearish on SolarCity and I have recommended shorting the stock multiple times over the last few months. Since I have a $5 price target on the stock, I think shorting SolarCity will prove to be a profitable bet.

However, shorting SolarCity is very expensive.
The borrowing rate for SolarCity’s stock can be over 60% per annum, which makes shorting the stock very difficult. I believe the high borrowing rate is being used to manipulate the stock.

Due to the high borrowing rate, short sellers are covering their position, which in turn has contributed widely to SolarCity’s rally. Also, due to the high borrowing rates, short sellers panic more which results in bigger short squeezes on any minor positive news.

For instance, SolarCity jumped almost 10% yesterday after San Francisco passed an ordinance requiring solar panels be installed on new small and mid-sized residential and commercial buildings despite the fact that San Francisco doesn’t have many new residential buildings and is running out of space.

So, the manipulatively high interest rates are being used to fuel the rally. However, SolarCity’s rallies never seem to last past the earnings season, which is what I think will happen again. SolarCity’s increasing interest expenses, growing losses and towering debt are long-term headwinds. Moreover, the company’s interest expenses are almost as big as its gross margin, which tells me that its business model is not sustainable in the long run.

Conclusion

Since shorting SolarCity is expensive, I think investors should try to time the stock’s decline. If the past is any indication, SolarCity usually struggles after reporting its earnings. Due to its terrible business model, SolarCity manages to report terrible earnings more often than not. The stock crashed over 30% each of the last two times it shared its quarterly report.

I expect SolarCity to report terrible earnings once again, which ultimately will lead to a crash. Hence, I strongly believe that investors trying to short SolarCity should initiate a position just before the earnings date so that they don’t have to incur massive borrowing costs and can enjoy a quick profit. For the long-term, I still have a $5 price target on the stock.
Published on Apr 21, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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