Thursday, December 20, 2012

Solar Junk Rally Over? ($STP)

Some people are figuring it out,

"'The measures so far are counterproductive, they should let bad companies go bankrupt and let capacity rationalization happen,' [said] Alex Morris, an energy analyst [...] 'Investors should take the opportunity of this junk rally to actively short these solar stocks.'"
You rarely hear sell side analysts tell you to sell short! I mentioned yesterday how profoundly irrational it is to buy stock in a firm with bonds due in three months trading at 40.


John said...

I remember Marty Whitman said if a bond is traded at big discount, the equity should be worth zero.

But I don't completely agree. I don't think it's completely insane.

When the bond is traded at 40, assuming it's correctly priced by the market,

0 x Pr(bankruptcy and I get nothing back) +
90 x Pr(bankruptcy but I get my initial capital back from the collateral) +
100 x Pr(solvent)

It's possible to have non-zero Pr(solvent), which implies equity is not zero.

We can question whether Pr(solvent) is so low that the equity price correctly reflects it. But it doesn't mean equity price is zero.

(disclosure: no position)

CP said...

Of course, but we are far beyond the point where the equity correctly reflects the possibility of solvency. No one would think anything of it if the market cap was $10 million. But during the rally the market cap was bigger than the market value of the bonds. Totally crazy.

misha said...

Still can't find a retail brokerage that will trade STP bonds. Any suggestions? I have access to IB, ETrade, TD Ameritrade, and OptionsXpress. Can't find them anywhere.

CP said...

It wouldn't be the end of the world to buy only the puts. I'm thinking that the entire capital structure goes to zero.