It always shocks me when a big trader comes out and says they're shorting a stock. Mostly, because I'd prefer to keep it quiet (people generally hate short-sellers, whether that's illogical or not). A hedge fund manager and Greentech Media contributor is advocating shorting First Solar. I figure, he's looked carefully at the industry, he must know something. So I thought I'd check it out. John Hempton of Bronte Capital says First Solar became a great company by innovating efficiencies in the manufacturing of solar cells. But he thinks that these efficiencies are largely evaporating as the price of solar-cell silicon material drops and competition from the semiconductor industry closes in fast. Here's some of what he writes:

In First Solar's case, the competition has come in a couple of forms. First, it came from Applied Materials. Applied Materials, or AMAT (as the company is known), is the most important company in the world you have never heard of. It is the dominant maker of capital equipment that goes into semiconductor factories and it is thus the company that, more than any other, provides the kit to keep Moore’s Law active... We are trying to work out the cost-structures of the polycrystalline manufacturers, but it looks to us that the extra glass and other balance-of-system costs that First Solar panels have are now getting close to completely removing the advantage of low semiconductor material usage. If that happens, First Solar is toast. It probably won’t file bankruptcy, because it has so much in past profits to fall back on, but it will be every bit as obsolete as a Palm organizer is now or as a Garmin car-based navigation system might be in five years.

Dem's fighting words, eh! Obsolete! Bankruptcy! Hmm... first of all, last I checked, Garmin was doing fine and printing up lots of money. But that's a story for another day... Mr. Hempton probably knows a lot more than me about about the solar market. But I know a fair amount about losing money shorting stocks (I've done it plenty of times). Here's my take: 1) To short a technology stock on their "technology will be obsolete" theory, your timing has to be impeccable. It's easier to be too early than too late (companies can still churn out big numbers years after somebody has innovated past them) 2) Your timing needs to be impeccable (is it really the right time to short it?) 3) The fundamentals should be  already be evidently deteriorating before you pile in 4) You should use technical analysis to protect yourself and determine the right entry point 5) Preferably, the company should be overvalued on the P/E basis. I took a quick look at the fundamentals, and they are not shortable to me: Market Cap (M): $10,599.96 P/E Ratio: 16.51 PEG Ratio: 0.642857 Next Earnings: 04/28/2010 Profits in the last four quarters, counting backwards: $141M, $153M, $181M, $164M The P/E is not extraordinarily high. The PEG ratio is low. So in shorting this stock, you've already lost one advantage: It's not overvalued, really. You can see from the earnings that its profit margins are being pressured a bit, but in no way does this look like a disaster story yet. It makes money. Okay, what about the technicals? A quick look at the chart says to me, Bronte may be early in shorting First Solar. The chart looks okay, as it's bouncing. Looks to me like it could still run higher. I commend Mr. Hempton for trying to take on the giant (I can only imagine the phone calls he got from the company after publishing this piece). But when you are shorting a company that's still relatively cheaply valued and making money in a stock market that's running up, you are playing with fire. Maybe the earnings at the end of the month will give us clues as to whether Hempton's "disaster" scenario is starting to play out. But to me it looks very, very early to start hypothesizing that the end is near for First Solar.