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LDK Solar Co., Ltd. Bears Betting on a Post-Earnings Plunge

Investors are none too happy heading into the solar firm's quarterly report

by 3/29/2010 11:00:00 AM
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Solar wafer manufacturer LDK Solar Co., Ltd. (LDK) is scheduled to release its quarterly earnings ahead of the open tomorrow morning, and judging from the stock's sentiment backdrop, investor expectations are set pretty low for the event. Checking in with the analyst community, Wall Street is expecting the company to post a profit of 12 cents per share, a figure that is impressively higher than LDK's loss of $1.25 per share in the same quarter last year.

Historically, the company has been a volatile performer on the earnings stage. During the most recent reporting period, LDK posted a profit of 27 cents per share, some 430% better than the consensus expectations for a loss of 8 cents per share. However, the firm missed by 123%, 250%, and 48% in the three quarters prior. On average, LDK has fallen short of analysts' estimates by about 4% during this time frame.

Apparently keying off the past year's poor fundamental performance, options traders appear to have set the bar pretty low. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.68 arrives higher than 84% of all such readings taken during the past year. What's more, this ratio has trended higher since March options expiration, jumping from its March 19 reading of 0.95, in the 65th percentile. This rise in LDK's SOIR indicates that puts are being added at a faster rate than calls among near-term options, pointing toward growing bearish sentiment among these speculative investors.

Outside the options pits, short sellers are also lined up against the security. Despite a nearly 4% decline in short interest, nearly 17% of the stock's float remains sold short. Furthermore, at the security's average daily trading volume, it would take more than seven days for investors to repurchase these bearish bets. This sizable short position could work in LDK's favor. Should the company's earnings report receive a warm welcome, these short sellers could be forced into buying back their positions in order to limit losses, creating the potential for a short-squeeze situation.

Short interest chart for LDK

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