First Solar: Buy When Blood's In The Street And Fade Everything Else

| About: First Solar, (FSLR)

The market story so far in 2012 is how things are not as bad as everyone feared. We wrote at the end of 2011 that many stocks were way oversold and identified 6 in particular in purchase (see: 6 Hated Stocks With 50% Upside Potential For 2012). Since the Dec 28th article, 4 of the 6 have indeed hit the 50% target:

Stock Dec 28, 2011 Price 2012 Target Price Objective Met
(NYSE:BAC) $5.31 $8 Yes 50.6%
(NASDAQ:FSLR) $31.93 $48 Yes 50.3%
(NYSE:GM) $19.88 $30 No Currently $26.07
(NASDAQ:NFLX) $69.03 $104 Yes 50.7%
(NYSE:RENN) $3.28 $5 Yes 52.4%
(RIMM) $14.31 $22 No Currently $13.49

While the end of the year call was fairly easy to understand, as the carnage was rampant, it is much harder to take a stance in recent low-volume glide-up over the past 2 months. Are things better for real? Is Europe fixed? Can the central banks quit printing money to pretend everything is just fine?

We have consistently argued, since joining Seeking Alpha, that the market has been overly pessimistic. In fact, if you look through our past articles, we have identified many winning strategies and situations to buy when everyone else was scared to death. Simply put, the market was underestimating the resolve of the central bankers and therefore was mis-pricing risk/reward.

Fast forward to the current situation, and the opposite is happening. Confidence has been restored and many find themselves "chasing" the run-up. While the general issues underlying the economies of the world are still upside-down, the market has chosen to look at the glass as half-full and faith in the future is trending higher.

Be Careful, Start To Fade

Now is the time to start fading the rallies in the stocks that have been working so well. From large dividend players such as Phillip Morris International (NYSE:PM) and Coke (NYSE:KO), to momentum stocks like Apple (NASDAQ:AAPL), NetFlix (NFLX), and Intel (NASDAQ:INTC), we suggest that investors sell 1/5 of their position and then incrementally sell at each 3% move higher.

For example, take AAPL ($568.10):

  • Sell 20% at $568.10
  • Sell 20% at $585.14
  • Sell 20% at $602.70
  • Sell 20% at $620.78
  • Sell 20% at $639.40

By scaling this move you will protect your investing powder for a better day. IE, a day where everyone is a bit more afraid of the risks still below the surface. You won't necessarily get the highest price, but you will have peace of mind and cash to invest when the crowd reverses course.

One Sector Still Depressed: Solar

While most companies (and sectors) have rebounded nicely, there is still a sector that continues to be qualified as "unloved". Solar companies almost unanimously are out of favor. They are rightly out of favor because they face a double squeeze on both declining sales and decreasing margins. Declining sales because governments around the world have tightened their belts and will be reducing subsidies. And decreasing margins because the industry as a whole built production facilities to produce significantly more panels than will be sold.

Companies must run their plants even when they don't make much money on each incremental sale because the economics of manufacturing in this industry requires plants to be at or near full production. Margins have dropped to single digits for many producers, and many smaller players are being driven out of the market. Even the largest and most integrated companies must worry about preserving cash and servicing debt commitments.

FSLR: Premium Position, Discount Valuation

First Solar (FSLR) is our favorite in this sector to buy, as blood continues to flow in the street. The company qualifies as a major producer and has been profitable for many years prior to this year's meltdown. The company has more cash than debt, which is enviable relative to many of their peers, and their production costs are lower than the industry average (and projected to move even lower over the next 3 years). Finally, another large positive is that their major shareholders are the Sam Walton Family (at roughly 15%), which means that if the industry gets even worse, then FSLR should have access to deeper pockets than most.

The stock valuation has plummeted to a reasonable $2.36B, which is a mere pittance of its former lofty valuations (52wk range $25.29-$163.00), and we recommend investors scale-buy into a position starting at $24, with a low side target buy price of $15.

For example, using a 1/4 scale-buy strategy:

  • Buy 25% at $24
  • Buy 25% at $21
  • Buy 25% at $18
  • Buy 25% at $15

Make no mistake, First Solar is a leader in an industry that is facing some uphill battles in the near term. However, we believe that alternative energy in general, and solar in particular, will work through the issues and return to a state of well above average growth. The need for energy in all forms is visible and growing worldwide, and large well-capitalized companies like FSLR should be bought when they are bloodied so bad that most investors have written them off for dead.

Disclosure: I am long (FSLR), (GM).

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