* Shorts piling on First Solar
* Bears see competitive advantage fading
* Bulls see rebound, say stock price is attractive
LOS ANGELES/NEW YORK, May 26 (Reuters) - First Solar Inc (FSLR.O) became the world's most valuable solar company because its cadmium telluride panels are the cheapest in the industry.
Investor euphoria for green technology sent the Wall Street darling's shares to an all-time high of $317 in May of 2008, just 18 months after debuting on the market at $20 a share.
On Thursday, the stock closed down 2.2 percent at $117.96 on the NASDAQ.
Three years later, however, the stock has shed more than 60 percent of its value and it is among the most heavily shorted stocks in the Standard & Poor's 500 index. As of May 13, more than 30 percent of its free float was held in short positions.
Investors who sell securities "short" profit from betting stocks will fall. Short-sellers borrow shares, then sell them, waiting for the stock to fall so they can buy the shares at the lower price, return them to the lender and pocket the difference.
On Wednesday, famed short seller James Chanos said he is betting that shares in First Solar will fall, in part because solar power is still too expensive to compete with traditional sources of electricity generation. He also said Chinese competitors are increasing capacity and cutting costs so rapidly that profits across the industry are suffering.
So is Chanos correct that First Solar is caught in an irreversible downward spiral? Or is recent weakness in the stock a prime opportunity to buy into one of the industry's market leaders?
COST ADVANTAGE DETERIORATING
Gordon Johnson, head of alternative energy research at Axiom Capital Management in New York, said the cost advantage of First Solar's thin film modules is deteriorating as prices for polysilicon, the material used by most panel makers, have declined sharply. He has a "sell" rating on First Solar.
"Crystalline silicon (modules) were $1.45 on a per watt basis ... and in the first quarter of this year, First Solar's prices on average were $1.33. First Solar has to be at a 25-cent discount to crystalline silicon to compete because thin film modules are less efficient than crystalline silicon. You could see crystalline silicon prices on par with First Solar by the end of the second quarter."
Increasing manufacturing capacity across the industry will boost global supplies of modules, while big solar markets such as Germany, Italy, France and the Czech Republic have cut their subsidies for solar.
"The market will actually decline this year at a time when you have supply more than doubling," Johnson said.
Investors should also be concerned about the expiration of a U.S. government cash-grant program for renewable energy plants. Four of First Solar's biggest U.S. projects are also relying on a U.S. loan guarantee program, but those funds may not get approved, and the program expires later this year.
"Globally you're seeing markets move away from large-scale projects, which was First Solar and the thin film industry's bread and butter," Johnson said. "If you're trying to do new projects today, at today's (contracted power prices), and there is no cash grant (beyond 2011) and no loan guarantee, the economics do not justify the risk."
OUTPERFORMING AT THE WORST OF TIMES
Mark Bachman, an analyst with Auriga USA, recently upgraded First Solar to "buy," with a $160 price target. He says Chanos is dead wrong about both the solar industry and First Solar:
"It's easy to agree with some of his comments that solar is too expensive. Well of course it is if you put it in the wrong spot. He tries to rile people up and say solar and wind cannot offset baseload generation. It can't offset coal, it can't offset nuclear, it can't offset natural gas. It's not meant to. And we know that because the wind only blows at certain times and the sun only shines at certain times. But at the times that it does, it's a lower cost source of electricity than those baseload generations that he's talking about."
Given the large number of short sellers in the stock, it is difficult for bears to add to those positions, he said.
"When (Chanos) was making his comments yesterday there were zero shares available to short. So as much as he wants to pound the shorts on this, there was no availability to do it. There is nobody out there lending any shares. The bottom line is, even in the worst of times this company continues to be an outperformer."
The pressure on the shares has pushed them to attractive levels, Bachman said, and the solar market's problems in the first half of the year are likely to ease in the coming months.
"To see the stock dip underneath $120 over the past two trading days, it's a prime opportunity for people to get in on this. It's only a matter of time before this year starts to take off. It was largely due to Italy not setting their (subsidy), or setting it at a slower place, that put the industry on hold. We're already getting first signs that volumes are up. Investors are sitting on the sidelines right now waiting for more indications, but then these stocks will run substantially through the summer months and all the way into Q3." (Reporting by Nichola Groom, editing by Bernard Orr)