Big Business EconomyWritten by Havre On 02 December 2011
Hoku Corporation a Falling Star

As one of the few Hawaii companies to launch a successful IPO (initial public offering), Hoku Corporation was once a “star.” (Hoku means star in Hawaiian.) That has changed in the last few years, with its stock price tumbling and a recent troubling 10-Q SEC filing. (10-Qs are quarterly reports required by all publicly traded companies.)

Hoku went public as a fuel cell company and then shifted gears to become a manufacturer of polysilicon, which is used in photovoltaic solar panels. To accomplish that, it set out to construct a manufacturing plant in Idaho, utilizing incentives from the state of Idaho and the financial backing of Merrill Lynch.

Then came the financial meltdown of 2008. Merrill basically went upside down, resulting in its bail out and purchase by Bank of America. This left Hoku on its own to complete the project and fulfill purchase orders that it had taken deposits on. Long story short, Tianwei of China bailed Hoku out. One of Hoku’s customers that it had commitments to, Tianwei is now Hoku’s majority shareholder with options to increase its ownership.

Hoku is now in a situation where the price of polysilicon has been dropping. It has become a commodity and necessitated a reworking of its financial projections. The plant, originally expected to cost $410 million, is still not completed. It is now estimated to be approximately $700 million. As of Sept. 30, the plant has cost Hoku $576 million.

We also learned in its 10-Q filing that in the 3rd quarter of 2011, it took on $25 million in new debt financing and in October an additional $35.7 million, all backed by letters of credit from Tianwei. According to Yahoo Finance, its balance sheet now shows $3.2 million in cash and $320 million in debt. I’m not sure if the recent debt is included in that figure.

Hoku’s stock price has reflected the troubles at the company, going from approximately $11 per share four years ago to $0.80 a share recently. (52-week range is $0.80 to $3.24 per share.) We also have seen the short interest (those who are betting on the downside) increase from 1.27 million shares on Oct. 31 to 1.76 million shares on Nov. 15, a 39 percent increase.

What investors need to be aware of in this situation is what is called a “short squeeze.” To “short” a stock, you need to borrow the shares from your stock broker and then sell those shares on the market with the hope that the share price falls. Eventually, you can buy those shares back on the market at a lower price and return them to your stock broker, making money off the price differential. (For example, you sell the borrowed shares at $20 and buy them back at $12, making an $8 profit.)

The short positions at some point need to be liquidated, meaning those short sales covered by buying back the stock. If all the “shorts” try to cover/buy at the same time, it causes a “short squeeze,” driving the share price up solely due to volume, not fundamentals, at least temporarily. With an average daily trading volume between 63,000 shares (during the last 10 trading days) and 36,000 (during the last three months), it would take anywhere from 28 to 57 normal trading days to cover the outstanding short interest, but with everybody running out the door at the same time it becomes quite a crowded trade.

Short sellers are usually pretty savvy and negative folks, so this also tells us that they must feel that the shares are going even lower before they cover their positions. It also says that Tianwei will probably end up owning Hoku completely as the largest shareholder and holder/guarantor of its debt.

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Randy Havre has a wealth of experience in the financial industry. In 1987, he established his own full-service stock brokerage firm, which was also registered with the SEC as an Investment Advisory Firm, managing money for the State of Hawaii’s pension fund, among other portfolios. In 1994, he started his first of three Hawaii based Venture Capital Funds. Additionally, he wrote a weekly stock column in the Pacific Business News for 21 years, taught Finance 315 Portfolio Management and Investment Strategies at the University of Hawaii for five years and is on KHON’s Morning News as a business/financial analysis twice weekly. Over the past nine years, Havre has been active in South America doing business development work for some of his portfolio companies, mentoring entrepreneurs and advising investors.

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