First Solar's Breakout Should Hold Up

First Solar (FSLR) is a top solar play which broke out of its first significant base since going public. It's hard to believe a stock could run more than 500% without carving out a significant base along the way, but that's been the case with many solar stocks.

For this reason I do NOT adhere to the rule that says you should wait to initiate a position in an IPO until it carves out its first base. The best IPOs often don't carve out a decent base until AFTER they have run up 50-100..-500%!

ABOUT:

First Solar, Inc. (First Solar) designs and manufactures solar modules using a thin film semiconductor technology. The Company manufactures its solar modules on high-throughput production lines. Its solar modules employ a thin layer of cadmium telluride semiconductor material to convert sunlight into electricity. In August 2006, First Solar completed its Ohio expansion, adding two 25 megawatt production lines to its existing 25 megawatt base plant.

The Company describes its production capacity with a nameplate rating, which means minimum expected annual production. It assigns each production line a 25 megawatt nameplate rating. With the completion of its Ohio expansion, First Solar has an annual manufacturing capacity of 75 megawatt. The Company is also building a four line 100 megawatt plant in Germany. During the fiscal year ended December 30, 2006, First Solar entered into long-term solar module supply contracts with six European project developers and system integrators.

FUNDAMENTALS:

Like all solar companies, First Solar (FSLR) has been posting extraordinary sales and profits over the past several quarters and posted its first full year profit last year. This year profit growth is expected to explode nearly 1000% over 2006. No wonder the stock has soared over 500% since going public just over a year ago. Net margins are excellent at around 26% but Return on Equity is disappointing at around 2%. Not what you want to see in a leading company.

While First Solar (FSLR) isn't currently the strongest solar company fundamentally, it's often touted as the one with the greatest potential. First Solar (FSLR) should certainly be near the top of any breakout watch list right now.

TECHNICAL:

Following a huge run like FSLR has had I like to see a much larger, smoother base form than the one that FSLR has formed over the past few months. However, given the industry it's in (solar is still hot) and the growth, today's breakout should not be ignored. What I would do to decrease the risk of an entry is avoid initiating a position on the breakout and see how the stock performs over the next several days. Does it continue spiking higher with heavy volume, then pull back to near the breakout point (at 123.31 with light selling volume)?

This is an indication that the breakout is strong and will undoubtedly hold up. You can bet I'll be initiating a position of my own in this case.

Disclosure: Author has no position in FSLR at time of writing

Comments

[TraderMark]

What is your timeline? Short term trade or long term?

Longer term there are some issues such as the polysilicon based producers of panels finally seeing price reductions in their cost basis as pricing comes down in latter 2008-2009 etc. Also I didn't see any comment about valuation in terms of price earnings for even 2008 - are you suspending all analysis on behalf of a short term trade ? Hard to tell as I can't determine your timeline for this trade (investment?) thanks

[fxtrader07]

It's an extremely poorly researched and superficial "analysis" presented by Mr. Dwinnell here on FSLR.

FSLR spots an expensive and inferior cadmium-tellur technology. It will have to recycle each and every panel sold due to the cadmium built into them.
It may face potentially disruptive shortages of tellurium which is very scarce, used in many future technologies and teherefore may be subject to a sharp rise in prices. The company has repeatedly stated in its sec-filings that they have almost no hedges against rising commodity prices in general. In sharp contrast, the sales-contracts closed are almost all on a fixed-price basis. That alonecould put teh company under extreme pressure given the trends in commodity prices.
The costs-per-watt-numbers given in their press releases do not match with their sales and earnings filings with the SEC. That alone raises a huge red flag!
Given the euphoria and exuberance concerning the Solar industry as a whole, FSLR is an extremely high risk-low reward stock on a longer term perspective. Their earnmings are by no means "extraordinary&qu... as claimed by the author but rather mediocre. There is absolutely nothing in the fundamental picture justifying a >100 forward price-earnings-ratio.
The stock may rise further, short-term, driven by greedy short term oriented traders and momentum players as well as by short-squeezes. Longer term, the current price is ridiculously high bordering to obscenely overvalued.
I expect that 12-18 months from now, the bubble in this stock will most likely have burst and the stock price collapse towards 30-40$ if not lower