ReneSola: Secondary Offering Pressures Shares

ReneSola Ltd. (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 yesterday’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.

Disclosure: Author does not have a position in SOL

This article has 4 comments:

• Ace22

  Jun 13 08:07 AM
  whats the price there selling the shares for?
• Zachary
  Scheidt

  Jun 13 08:20 AM

  My Website
  The short answer is that we won't know until the deal actually transpires...
  
  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
• gebby

  Jun 13 08:36 AM

  My Website
  this type of action is so typical. always the same playbook. of course the underwriters starting shorting the stock with extreme confidence when it was 23.(it became a hard to borrow stock then). why doesnt wall street decide to look beyond the short term. the dilution is not that great and earnings growth is spectacular. the correction from the highs is already significant. buy the shares and go on vacation.
• Van Gastel

  Jun 13 10:09 AM
  As usual American investors seem to be oblivious to what is happening over here. In London, Renesola is down 14% and on the NYSE it opened up a couple of percent. If there ever was a hedging opportunity. Hello, sell while you can. NOW..

Have your say! Add your comment:

Name / Pseudonym:    change

Required - future and past comments will appear under this name

Website:    change

Optional - e.g. www.myblog.com

Submitting comment, please wait ...

Most Popular Feeds

• ETFs

• US Market

• Long Ideas

  ">

• Alt. Energy

• Full list of feeds »

Trading Center