First Solar (NASDAQ:FSLR) has run an "intriguing" script since making an all-time low last August …
- Shorts cover and/or get squeezed, helping to launch the stock off its 2012 and all-time low: over a period of 6 months, shares short drop almost 50% while the stock increases almost 70%.
- An all-day confab with analysts with very bullish long-range plans and forecasts ignites the stock higher (April 9, 2013). In one day, the stock jumped an incredible 46%.
- Goldman Sachs (NYSE:GS) upgrades FSLR from neutral to buy as the stock churned under 18-month highs (May 30, 2013).
- Company announces a public offering of 8.5M shares as the stock continues loitering below 18-month highs unable to regain momentum and generate a fresh breakthrough. Offering prices at $46/share, right above presumed support at the stocks 50-day moving average (DMA).
The offering of shares is of course well-timed given the run-up. With its currency this high, FSLR can afford to generate and bank additional cash to invest in its future. During its April analyst day, the company announced it is re-committing itself to fundamental R&D. FSLR expects to widen the gap between itself and its heavily indebted competitors who will continue to struggle to repair their balance sheets. This extra cash allows FSLR to turn up the heat further and/or slog through any further setbacks in the global economy.
For investors and traders chasing momentum ever higher, the immediate outlook is not so hot. On May 22, I pointed out a likely blow-off top in the stock (along with others). Not even the 11th-hour Goldman Sachs upgrade could recreate enough momentum to overcome that topping pattern. The 11% slide on the heels of the share offering seals the deal on this top. Now, FSLR will have to show tangible results for its investments to re-establish upward momentum and this could take several quarters, perhaps more.
The quotes in Seeking Alpha's currents are telling:
"…MoneyBeat says the deal is well-timed, given the stock's near-doubling in recent months and investors' generally warm reception to recent corporate stock sales…Goldman Sachs calls the move 'a positive and opportunistic maneuver' to prepare for such ends."
(Note well that FSLR is now down 15% from its close the day of the Goldman upgrade)
Also telling is the behavior of trading in FSLR options. The open interest put/call ratio dropped to 2+ year lows in late March. Short interest also stopped its rapid decline and stabilized at that point. Since then, the open interest put/call ratio has shot back up to the 50th percentile. I can only assume that FSLR's 46% one-day gain made the stock incredibly risky to short, making the constrained risk of options much more attractive. (Or perhaps investors were moving to protect gains).
So, even as the stock is breaking down, I do not expect shares short to increase rapidly. Instead, the action in puts may heat up. So far, the bulk of the action is concentrated in options expiring next week. The put/call volume for these options trading by the close was 1.3, well above the 1.0 ratio open interest ratio going into the day. I will be looking to close out my own position in the coming week or two, depending on the reaction to the pricing of the share offering. It is always possible that the $46 price tag will establish a floor in the stock right at the natural support of the 50-day moving average, and as extra liquidity provides fresh buying interest in the stock.
A top in the making for First Solar
Be careful out there!
Disclosure: I am short FSLR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Short FSLR through put spreads