First Solar On An Earnings Run

On June 11, I tried to make the case that the stock price of First Solar (FSLR) does not properly reflect the risks to its business and premium valuation. I also laid out the technical case that seemed to confirm short-term weakness. Yesterday (June 23), FSLR all but nullified my technically-based complaints with a nice one-day 7.4% jump in response to analyst upgrades. AmTech's price target of $450 was perhaps the most significant piece of news. Briefing.com supplies the following quote:

AmTech says that since becoming a public co, shares of FSLR are up on average 14% from the completion of any given quarter (the June 30, 2008 equivalent) through the report date. Excluding the reporting period for Q407 where shares were down 34% into the print due to general macro concerns and a difficult tech tape, shares of FSLR are up 24% on average into earnings reports. Outside of firm's longer-term positive thesis on FSLR, they believe that there is likely a near-term trading opportunity in shares prior to earnings. Firm believes the Q208 pre-earnings trade is setting up similarly to Q207 as the co is currently ramping capacity in Malaysia, similar to the German ramp in mid-07.

I calculated the percentage moves in stock price that FSLR has experienced from the close the day after an earnings announcement to the close right before the next earnings announcement - so this data excludes the one-day move from the last earnings announcement: 2/14/07 to 5/3/07 = 32.6%, 5/4/07 to 7/31/07 = 68.8%, 8/1/07 to 11/7/07 = 55.5%, 11/8/07 to 2/12/07 = -21.8%, 2/13/07 to 4/30/07 = 27.8%. Clearly, traders look forward to FSLR's earnings reports! Monday's price move has almost pulled FSLR even with its close the day after the last earnings on 4/30/07 ($303.98). If I had earlier noted these strong runs into earnings, I would have been forced to reduce my short-term bearishness on FSLR in the last piece! Anyway, if history is any indicator, then let's set a "conservative" target of a 20% lift between earnings for a $360 price target. A stop at the June low of $233.97 gives you a potential loss of 19%, so the risk/reward on this trade is little better than 1:1. A stop under the last small correction at $265.20 gives a potential loss of 8%. Much better, but also much higher chance of getting stopped out.

The chart below shows the current technical picture. When I last wrote on FSLR, I noted that the strong on-balance volume was one positive. It looks like it could now be the underpinning of a any pre-earnings rally. (The chart does not include notes on overhead resistance marked by the all-time high at $317 or the congestion area from April between $268 and $304 or so).
 

 

Note well that my use of the term "bear trap" is not to suggest that a short squeeze may be underway. In fact, the bears seem particularly "quiet" on FSLR. The put/call ratio is about 1.25, but that ratio is just around the middle of the range for FSLR over the past year. The shorts were hot and heavy on FSLR's case in the second half of 2007, especially after a big dip in August. But FSLR went on to almost triple in price by the end of the year. The shorts bailed almost perfectly at the top of that run. The chart below shows that the number of shorts in FSLR cratered after that top and has since remained near the 52-week lows. (Data from nasdaq.com)

I remain highly suspect of FSLR's premium valuation, but I must respect the market action and building momentum and switch to a (short-term) bullish stance. Note this a one-month (high risk) trading call only. I personally would not be long going into FSLR's next earnings report. As indicated above, a break of the June low before earnings will invalidate this view. A break below the last correction low puts this view at high risk of invalidation. Also note that with all the analyst chatter in the past month or more speculating about FSLR's business, FSLR has yet to make a single announcement regarding new contracts, new business, progress on its Malaysian manufacturing plants, earnings and/or revenue guidance, etc...

Be careful out there!

Full disclosure: No position in FSLR at the time of writing.

Comments

[tessant:]

shorts have been burned over and over with this stock...will it continue?

Scott
solarfeeds

2008 Jun 24 10:10 AM

[Navivest:]

There is one major factor that was left out of this wonderful and insightful analysis, sentiment. There aren't too many stocks that are actually trading where they should be trading based on absolute fundamentals.

Unfortunately, what matters is where Wall Street thinks the stock should be. Is (FSLR) overpriced? Yes. Is Wall Street overlooking that right now? Yes. So until solar stops being one of the hot sector of the moment or the company absolutely disappoints, we won't see a huge decline in the shares, or they'll rebound in very short order.

Also, I would not stay away from the earnings, its a good way to make great money. When earnings time gets close, buy some calls, then hedge the position.

There are strategies to ensure you make money in a stock like (FSLR) which is guaranteed to move strongly on an earnings release even without knowing which way the stock go.

2008 Jun 24 11:23 AM

[Stockaccumu...:]

But while everyone is piling into ESLR, raising its PE rediculously high, a smarter play today is a strong buy on Renesola, with far greater profit growth and far lower PE. SOL is the most important rare buy/play today... Strong buy at this price, for certain... This will be the last we will see of these types of low numbers for SOL. Late July, into earnings will be a whole different story. We all know that. Also the price is so low today, that short interest is dropping off, as it logically does. (Some analysts are commenting on the fact that short interest in SOL has dropped off considerably, as the price is very much in the danger zone for shorts. And, last time short interest dropped in SOL, its share price started going up about 2 to 6 percent a day for about 25 days, before it slowed down (see/research for april, may, into June). Nobody will short SOL at this price, too risky; SOL price is extremely low, and has an incredibly low PE, for such fast growing/exponential profit growth shown. Also useless to try to time SOL, you will just miss that great rise which we all know will come into the next few weeks. We are long SOL with some shares, but buying more likely today... SOL is still one of our favorites of all time... a must own now for sure (SEE what Motley Fool mentions today about an all important fund getting into SOL big, read that article)... Best of all solars in profit growth and extremely Low PE at SOL... nothing wrong with the company, so we are happy to hold, though could have sold it off... but no reason to sell, since it is a great success story.

Really, much less than a year from now, we all know SOL will still exist (unless it is bought out for a pretty penny by some other asian solar company). And we all know that even less than a year from now, SOL will have a value 300% greater than today's price...

2008 Jun 24 11:29 AM

[Stockaccumu...:]

Corrects typo ....

Nice article, but while everyone is piling into FSLR, raising its PE rediculously high, a far smarter play today is a strong buy on Renesola, with far greater profit growth and far lower PE. SOL is the most important rare buy/play today... Strong buy at this (today's) price, for certain... This will be the last we will see of these types of low numbers for SOL. Late July, into earnings will be a whole different story. We all know that. Also the price is so low today, that short interest is dropping off, as it logically does. (Some analysts are commenting on the fact that short interest in SOL has dropped off considerably, as the price is very much in the danger zone for shorts. And, last time short interest dropped in SOL, its share price started going up about 2 to 6 percent a day for about 25 days, before it slowed down (see/research for april, may, into June). Nobody will short SOL at this price, too risky; SOL price is extremely low, and has an incredibly low PE, for such fast growing/exponential profit growth shown. Also useless to try to time SOL, you will just miss that great rise which we all know will come into the next few weeks. We are long SOL with some shares, but buying more likely today... SOL is still one of our favorites of all time... a must own now for sure (SEE what Motley Fool mentions today about an all important fund getting into SOL big, read that article)... Best of all solars in profit growth and extremely Low PE at SOL... nothing wrong with the company, so we are happy to hold, though could have sold it off... but no reason to sell, since it is a great success story.

Really, much less than a year from now, we all know SOL will still exist (unless it is bought out for a pretty penny by some other asian solar company). And we all know that even less than a year from now, SOL will have a value 300% greater than today's price...

2008 Jun 24 11:31 AM

[Stephen Fra...:]

FSLR's marketcap increased by $1.4 billion yesterday when an analyst said they might take in another $30 million of revenue.

Does that make sense to you?

I am short, I've been short for a while, and I'm confident that FSLR will trade at a similar valuation to the other solars - which means a sub-$200 (well, actually, a lot lower than that) stock.

Read more about my view on FSLR on this site or my own.

2008 Jun 24 11:33 AM

[PhillyD:]

Why isn't Suntech the much better solar play? Keeps bringing in screaming profits, has by far the lowest P/E of any solar AND just bought a huge interest in a wafter manufacturer!

2008 Jun 24 03:36 PM

[Mark Anthony:]

I continue to predict the FSLR will go out of business in two years. I repeatedly contacted FSLR and ask for their rebuttal. Never get any response. They should go out of business because of a global tellurium shortage. Read my articles on the subject:

seekingalpha.com/autho...

But timing the proper moment to short FSLR is tough. I currently do not have a FSLR shot position.

2008 Jun 25 02:11 AM

[absurd:]

Accumulator: SOL is overpriced big time! It competes directly with LDK who is becoming vertically integrated with its own silicon, thus lowering the production cost to levels that SOL will never achieve (not even close). Do your dd before investing.
Regarding FSLR I agree with Mark and think that it will probably be a good short opportunity in Fall or spring of 09, when WS starts dumping it.

2008 Jun 25 10:15 AM