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Summary

  • A slew of positive developments strengthen the long case for SunPower.
  • SunPower’s share price has finally broken out to new 52-week highs and high short interest might help fuel the rally.
  • The solar sector as a whole is improving and might help SunPower's share price in the near-term.

SunPower (NASDAQ:SPWR) finally broke out through its 8-month resistance levels. The stock had attempted to break out in January and early March but failed to do so. The second breakout attempt has failed because of the strong selloff in momentum stocks which has taken the whole solar sector down in the next two months. I believe that the third time might be the charm, and that SunPower should make substantial gains in the next couple of weeks or months. The fundamentals have improved and the whole U.S. solar sector is poised to rise in the future.

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Source: Stockcharts.com

Recent developments strengthen the long-case for SunPower

There was no lack of good news for the U.S. solar sector in the last couple of weeks, which helped the solar sector ETF (NYSEARCA:TAN) to bottom out and turn higher. One important development for U.S. solar stocks was the decision of the Department of Commerce to impose new preliminary tariffs on Chinese solar module imports, which are now between 18.5% and 35.2%. This came as a surprise as many were expecting a lower tariff or a settlement. This bodes well for SunPower and its U.S. peers, and they moved higher on the decision.

On SunPower's business side, good news is abundant. The company reported Q1 earnings and revenue that were above analyst estimates and the full-year guidance was also above expectations. The company ended the quarter with strong bookings in its commercial business, while it posted another solid quarter in its residential business. SunPower has also signed a deal with Google (NASDAQ:GOOG) to provide financing for about $250 million of residential solar lease projects. Google is committing up to $100 million and SunPower about $150 million. An additional deal with Admirals Bank was announced on June 16. These are important steps forward for SunPower, as they strengthen the company's growth strategy in the residential side of the business.

Another positive development was the recent $400 million convertible note offering. The company intends to use the funds for capex, to pay down existing debt and to pursue the SunPower's HoldCo strategy, as the company plans to create a solar project subsidiary that could sell a stake (most likely through an IPO). The offering features a very low interest rate of 0.875% and an initial conversion price of $48.76, which is almost 26% higher from the current price (but it was more than 40% at the time of the offering).

These recent developments have solidified SunPower's financial position and will help expand the company's growth strategy. Full-year EPS expectations have turned north on better than expected guidance, and there is room for further upside revisions as the company has beaten its EPS estimates significantly in the last four quarters.

New 52-week high and high short interest may inspire a strong rally

A perfect storm of positive developments may prove to be a strong catalyst for SunPower's share price. The additional fuel for the rally may be the high short interest. There are currently 11.16 million shares held short which amounts to 21.8% of the free float. I believe that with the breakout to new 52-week highs, the shorts will start to cover their positions in earnest, driving SunPower's share price higher. Short interest has already declined since mid-March, and was in part responsible for the 40% rise in SunPower's share price since its mid-April lows.

Conclusion

I believe that SunPower will continue to benefit from the recovery in the solar sector. The company boasts best-in-class product efficiency and is taking advantage of the growth in both commercial and residential side of the business. Recent developments have strengthened the long case for SunPower and the high short interest and a breakout to new 52-week high might spark a short-covering rally which might take the share price above $40 for the first time since 2008.

Source: A Perfect Storm Brings SunPower Above Long-Term Resistance