What Stocks Do At the End of a Death Spiral

Steve Kanaval  |

Alternative Energy play in Solar as shares retest the $5 area. News that the company traded debt (warrants) for common stock, in the mind of the uninformed, should free up cash and create liquidity. This would make sense except for one important factor, they did a death spiral 20-1 reverse split only a month ago and a $3.5 million dollar shelf offering for operating capital in April.

Today's debt conversion to common stock smacks of narrow minded CFO with only one "go to" trick in his quiver. The trick is to sock it to the common shareholders and the sleight of hand worked again today at least for a little bit before the short sellers pounce.

To illustrate my point, I need to tell you that shares of Real Solar were trading $105 and the company valuation was near $500 Million and today it’s around $22 million, meaning the company lost 96% of its value in a little more than a year. This is because the management used the shares like a spastic piggy bank - issuing warrants and other forms of sleight of hand - that did nothing but create more selling and attract short sellers and market-neutral players. Today's warrant swap for common is what companies do at the end of a death spiral, this is one of the final twerks the bird makes before it crashes into the ground. I know - I've seen it.

This is a cautionary story that reeks of what not to do when an industry (like solar) has volatility, and Real Goods Solar has had real volatility all along the way. You still have portfolio managers who short this stock from above $50 per share with big positions. They really don't care if the stock rally's $0.86 they think it will go to zero.

The short sellers will short this pop also and their average price will be $48 instead of $50 (not a big deal) and the stock is liquid, you can trade 100,000 shares in and out easily and you want this for your short candidate, so many are adding as we head into month end, and believe me they (the shorts) will mark this stock lower than today's prices before July 1...you can count on it.

So don't be fooled by this sleight of hand - Real Goods Solar - is a fallen angel who missed an opportunity in the Solar sector and is currently valued at $20 million. If you want to invest in solar, go look at other Solar stocks like Solar City (SCTY) , valued at $6 billion. What you will find is they didn't leverage the common shareholder with all the hi-jinks where they drew the attention of a few opportunistic short sellers who recognized they were a potential candidate for the death spiral. They pounced on them, this is a final rotation near the bottom of the death spiral before they crash slowly into the ground.


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