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First Solar and SunPower: Stocks Headed South? $FSLR, $SPWRA

It only took a day or two for First Solar (FSLR) and SunPower Corporation (SPWR) to confirm the bearish pattern I pointed out after the recent post-earnings celebration for SPWR. The charts below show rapid follow-through from the big fades that followed huge up days in each stock.


First Solar breaks down again

SunPower gives up almost all its post-earnings gainsSunPower gives up almost all its post-earnings gains

Source: FreeStockCharts.com

Note well that the bears and sellers who were trapped by First Solar’s strong gap up are no longer trapped (or at least those shorts that did not panic out of their positions). SunPower has now given up almost all of its post-earnings gains. That solar fade is one powerful bearish signal. In the last post, I warned:

“Anyone who has traded solar stocks for a while knows this post-earnings fade as the signature reversal so common with solar stocks. It is solar’s typical warning sign of declines to come.”

That warning followed another cautionary note I sent out following the bankruptcy announcement from Energy Conversion Devices (ENER) where I declared the “solar fun is over for now.” We should duly note that the sudden weakness in many solar stocks is coming as the major indices are either at or challenging multi-year highs. Once the stock market corrects from this rally, we should expect solar stocks to suffer further and larger losses (relative to whatever portion of the solar rally remains intact at that time). Yingli Energy Holdings (YGE) has already given back all of its gains for 2012. FSLR, Trina Solar (TSL), and MEMC Electronic Material (WFR) have are not far behind.

For now, I have closed out my puts and covered calls on FSLR. I feel naked, but I suspect the wild volatility in solar stocks will give me ample opportunity for playing defense again at better prices.

Be careful out there!

Full disclosure: long FSLR

Original Article on Dr. Duru

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Solar Stocks: Ready to Party? $STP $SPWR

A funny thing happened after I declared the “fun is done” in solar stocks: Suntech Power Holdings (STP) pre-announced higher than expected revenues and financial results for its fourth quarter, and SunPower Corporation (SPWR) reported earnings that gave solar traders and investors fresh hope. At one point, SPWR broke out from a nice consolidation above its 50-day moving average (DMA) with a 27.5% gain. The breakout was significantly smeared by a rush of selling from those highs. By the end of the day, SPWR’s monster gain was whittled down to “only” 8.7%. Anyone who has traded solar stocks for a while knows this post-earnings fade as the signature reversal so common with solar stocks. It is solar’s typical warning sign of losses to come.


SunPower’s post-earnings breakout meets heavy resistance

Source: FreeStockCharts.com

SPWR's glory lasted an hour before sellers took the stock down for the rest of the daySPWR’s glory lasted an hour before sellers took the stock down for the rest of the day

Source: Yahoo!Finance

STP had a similar fade. At one point the stock was up 16.6%, but it ended the day with a more modest 8.3% gain. STP remains well off recent highs.

The excitement also infected First Solar (FSLR). FSLR had the simultaneous good fortune of an analyst speculating that the company will resolve its permitting issues and achieve Department of Energy (DoE) funding. While the stock also experienced a heavy fade from the highs, at least the stock gapped up and reachieved a critical technical level. FSLR has returned to its former uptrend off the December lows. Moreover, the gap up “trapped” sellers who may have been shorting the stock after it broke down from recent highs to the 50DMA. These shorts are feeling serious regret and likely itching to cover sooner than later. I suspect after that buying pressure recedes, FSLR will lose its momentum – unless it pulls off a neat magic trick in earnings this week.

First Solar traps bears with a gap up back to the previous uptrend. The strong intra-day fade suggests bears will not remain trapped for long.First Solar traps bears with a gap up back to the previous uptrend. The strong intra-day fade suggests bears will not remain trapped for long.

Source: FreeStockCharts.com

I took advantage of the pop to sell a covered call against my current position. The extra pre-earnings premium helped make this a very attractive trade. I also purchased another round of puts made cheaper by the run-up but also including a pre-earnings premium. (The resulting position is a type of collar).

Be careful out there!

Full disclosure: long FSLR shares and puts, short FSLR call

Original Article on Dr. Duru

BTU International Warns As Solar Inventories Grow

BTU International (BTUI) is a global supplier of advanced thermal processing equipmentand processes to serving markets in solar cell, nuclear fuel and fuelcell manufacturing as well as electronics assembly and semiconductorpackaging. Before reporting disappointing earnings Tuesday evening, BTUI had a market cap of $117M.

This small company caught my big interest after I noticed BTUIattributed large downside guidance to a major solar customer who“…advised its suppliers that equipment deliveries have been put onhold…The delay in the execution of this order relates to a major part of the in-line diffusion equipment orders we announced this past January.” On January 10, BTUI soared 20% on news of two new orders for Meridian™ in-line diffusion furnaces worth $18M in revenue. The customers are both located in Asia, onebeing a new customer. Both customers are/were expanding capacity. Atthat time, these orders seemed very solid:

“We recognize that when the solar industry is ramping at a rapid pace, it is a difficult time for customers to change theirmanufacturing process… However, with strong pressure to lower cost perwatt, in-line, diffusion makes a strong case by offering state of theart cell efficiencies for existing and advanced cell processing, coupled with a lower cost of ownership.”

As a result of the delay, BTUI guided second quarter revenues down as much as 37% from $27.13M to $17-18M. While BTUI asserted that thisdelay may just represent a shift of revenues into the back half of theyear, by indicating “the timing of shipments of this order might affectour overall rate of growth for this year,” BTUI suggests there is somematerial possibility this order may be outright canceled. This warningwas enough to drop the stock 21% in after-hours trading, effectivelyerasing January’s gains from the announcement of the new orders.

BTUI also noted that inventories are building in the solar supply chain, causing prices to drop on solar panels:

“The solar industry is presently going through what webelieve to be a short-term cycle. The industry is absorbing asignificant amount of capacity additions, coupled with uncertainty about feed-in tariffs in Europe. We believe that inventory levels are higherthan expected leading to price pressure for solar panels. Accordingly,we have lowered our short term expectations for the rate of capacityexpansion in silicon based solar cells. We remain bullish on the mediumand long term outlook.”

The scenario of a second half slowdown as a result of last year’sindustry-wide announcements of massive capacity additions (see almostany earnings report from last year’s third and fourth quarters, like ReneSola {SOL}) was hotly debated. It looks like the alarm bells are ringing loud andclear now. I fully expect solar to go into an extended correction asthis reality fully sinks in and formerly bullish analysts start slashing estimates and ratings. I agree with BTUI that this inventory glutshould be short-term, but cyclical sell-offs can be swift and deep.However, such a correction should set up some great buying opportunities by early summer.

Although BTUI has been stuck in a trading range for most of the year, it held a 40% year-to-date gain going into earnings

Although BTUI has been stuck in a trading range for most of the year, it held a 40% year-to-date gain going into earnings

*Chart created using TeleChart:

Be careful out there!

Full disclosure: no positions

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Dick Chanos: Short First Solar Stock $FSLR

Famousshort-seller Dick Chanos visited the CNBC set on April 14 and talkedabout his expanding list of targets that includes alternative energy,especially First Solar (FSLR). In response, the stock dropped 2.7% thatday and did not stabilize until the stock lost almost 10% over thecourse of a week. Directly ahead of another earnings announcement (May3), I think it is worth visiting Chanos’s list of charges against FSLR.

Chanos’s reasons to short solar stocks and First Solar in particular:

  • Austerity in Germany, Italy, and Spain
  • Solar cannot do baseload power – solar costs 3x coal and natural gas plants
  • Enormous insider selling – the chairman has gotten rid of most of his stock in the last year and a half
  • Lots of people are leaving (most of the executive suite)

Chanos says that the last two points create a pattern that short-sellers love.

At the risk of being the mouse squeaking at the lion, I will take some issue with Chanos’s thesis regarding First Solar:

  1. FSLR has laid out a long-term roadmap for reducing dependence on European demand and subsidized markets, first introduced in July, 2009. Moreover, in the last earnings call, FSLR indicated the company has the flexibility to sell 500MW in uncontracted volumes.
  2. FSLR is on a path to achieving grid parity in the next few years – 2014 in the Southwest USA. The current story on solar is not about completely replacing baseloadcoal and natural gas but instead becoming a bigger part of the mix asenergy needs increase.
  3. Insider sales have indeed been large since at least 2009, and this is one of the tougher issues for FSLR bulls to address. The chairman and former CEO Michael Ahearn, sold a large quantity of stocknear FSLR’s 2010 lows (in February) at the same time current CEO andanother officer BOUGHT shares. CEO Robert J. Gillette purchased$1.05M worth of shares at the time. Ahearn and First Solar neverexplained this sale of 1.5M shares, but they were not a signal of FSLR’s imminent demise.
    However, Ahearn launched an aggressive automatic sale program in March,2011 that sold stock almost every trading day of that month for a totalof 800K (including February 28). Ahearn got much better prices this time around, ranging from $140-155/share. No explanation has appeared forthese sales. However, ultimately, I would consider sales by the currentCEO to be a much bigger red flag. Until then, I consider him a major inside buyer who trumps other insider sales. Moreover, Ahearn is in a position where he has already become incredibly rich and, for all we know, he isgradually moving to protect his massive wealth.
  4. The latest executive departure at First Solar was Bruce Sohn, President of Operations. Since Sohn was not replaced, this move looks like an organizationalrealignment that perhaps Sohn lost. I would be more worried if Sohnleft, and FSLR was left scrambling for a replacement. Nevertheless,executive departures are only a net good if they occur to correct knownproblems. FSLR has not announced such a thing for any of the recentdepartures.

So, while I am not convinced by the case Chanos presents, I am alsonot pounding the table to buy FSLR ahead of earnings. We already knowthat most solar companies that have reported or guided this quarter have produced lackluster to disappointing results for their respectivecompanies and/or the general solar market (see LDK Solar, Evergreen Solar, ReneSola and SunPower). We have to assume FSLR will do the same or similar. Based on earlierpost-earnings reactions, we know it does not take much for sellers todescend upon FSLR in sight of the slightest blemish on FSLR’s results. I think such weakness will be another one of those ideal buyingopportunities that I look for in solar stocks.

Dick Chanos has plenty of company although shares sold short hasremained relatively steady for about five months after a quick ramp from 2010?s bottom in shares short. Today’s 16M shares short represents a whopping 33% of FSLR’s float.

Shares sold short in First Solar are high but down from the even higher levels in 2009

Shares sold short in First Solar are high but down from the even higher levels in 2009

Source: nasdaq.com

The chart below summarizes the current technical picture (snapshot from Monday morning). Note that in February FSLR exceeded my upside valuation range of $162, getting as high as $175 partially on the boost of a Goldman Sachs upgrade. My downside floor remains $105 with an anticipated trading range of $120-150.

FSLR has trended upward since last summer, but it has been a very rocky ride

FSLR has trended upward since last summer, but it has been a very rocky ride

*Chart created using TeleChart:

Be careful out there!

Full disclosure: long FSLR, ESLR, and LDK

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Time to Buy LDK Solar? $LDK

Three months ago, LDK Solar (LDK) wowed the market with a tremendous hike in guidance for both the fourth quarter of FY10 and the entire FY2011. The stock closed up 18% on the day. LDK went on to retest 52-week highs before quickly closing January’s gap up in the market’s postJapan-quake swoon. Last week it retested those levels again.

Tuesday evening, LDK turned the tables and warned on first quarter guidance but held firm on its fiscal year 2011 guidance. By sticking to the full year guidance, there is essentially no newshere but the market responded by selling off the stock by 4% to $10.95on an otherwise strong day for the stock market. This move still leftintact the support of the 200-day moving average (DMA). The March lowshave held as well.

LDK has not made net progress in 6 months but it is holding support

LDK has not made net progress in 6 months but it is holding support

*Chart created using TeleChart:

…it is important to note that LDK’s stock has failed to make progress since the close before January’s blockbuster guidance. In other words,LDK can be purchased at a price that essentially ignores any good newsfor the remainder of the year….

(Click here to read the entire piece on Seeking Alpha)

Be careful out there!

Full disclosure: long LDK calls

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Will Evergreen Solar go Bankrupt? $ESLRA

I have questioned the finances and balance sheet of Evergreen Solar (ESLR). I have claimed that betting on ESLR is a speculative bet on survival. I used a pullback from the stock’s last big rally as an entry to makethat crazy boom or bust bet. Now, I must prepare for the very realpossibility that ESLR is simply not going to make it as a going concern.

Tonight, ESLR delivered an earnings warning, citing a faster than expected market-wide inventory build as a prime culprit for the latest cash crunch:

“As a result of our low year to date sales volume and potentially slower sales for the remainder of this year as the industry balances inventory levels, along with significantly increased pricing pressure, the cashthat we had previously expected to realize through the reduction inaccounts receivable and inventory from our recently closed Devensfacility will be less than expected and will take longer than expectedto realize. Therefore, our near term liquidity has been negativelyimpacted and may require us to secure additional sources of cash soonerthan expected. Accordingly, we will continue to aggressively pursueopportunities to address our capital structure in the near term,including restructuring our existing debt, in order to significantlydeleverage and better position ourselves to secure additionalfinancing…”

ESLR had sales in the first quarter of about $33.5M, a whopping dropof 62% from the previous quarter (I had to calculate these numbers based on reported shipments and average selling prices – both of whichdeclined). This will set up ESLR for a massive net profit loss in thefirst quarter; we already know the company had to close its Devens manufacturing facility in the face of mounting costs.

The second quarter seems to be running at the same pace as the firstquarter, but I am guessing sales go downhill from here. ESLR now has$33M in cash and restricted cash left in the bank after paying $10.75Min interest to bondholders. The high costs of servicing debt have beenan area of concern for several years as the company has not been able to get good terms on its past financing schemes. Any future financing will certainly be on even worse terms and require massive amounts ofdilution of the quickly shrinking value in the stock. If ESLR is correct about looming poor market conditions in the solar industry (we have tosuspect that the company’s own persistently poor sales performancemotivates such dire outlooks), financing and a restructuring may be next to impossible. Forget about favorable terms.

Can ESLR survive? After a two week 57% rally this month, I thoughtmaybe the market knew something good about some kind of revival.Instead, this phoenix proved to be just as much smoke as the previous big rally last October. The stock closed down over 17% in after-hours trading. The weekly chart below shows a stock on a forced “death march.” ESLR’s 1:6 reverse stock split only bought the company a few more months out of dollar storeterritory.


Evergreen Solar's "death march"
*Chart created using TeleChart:

To long-suffering ESLR shareholders, this latest setback is likelynot surprising. Perhaps the best outcome for the company will be a(fire?)sale of its patented technology (probably to a Chinese company)that salvages some remnants of the company.

(Click here for my archived commentary on ESLR)

Be careful out there!

Full disclosure: (unfortunately) long ESLR

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Where is Google’s Stock Headed? $GOOG

Excerpt from an article I published on Seeking Alpha. Click here to read the entire piece:

Google (GOOG) is down 9.2% since reporting earnings April 14 and nowsports a forward earnings multiple of 13. At $525, GOOG is at 7-monthlows and is again close to the psychologically significant $500 pricelevel. This combination of stats typically would motivate me to startaccumulating GOOG shares again, but I took a pause after reviewingGoogle’s net revenue metrics.

Google's revenue per employee still trends upward despite a rapid increase in hiring

Google’s revenue per employee still trends upward despite a rapid increase in hiring

Source: Google earnings reports

…The chart above shows that GOOG has managed to nurture an upwardtrend in net revenue per employee (including TAC – total acquisitioncosts) since this metric hit bottom in late 2007. However, net revenuegrowth has mainly flattened out since early 2010 while employee growthhas soared. If current trends continue, the upward trend inrevenue/employee will end very soon. Such an end will mark a double-topin revenue/employee, making GOOG less attractive as a “value play.”GOOG’s stock will do well just to hold current levels.

So, rather than start accumulating GOOG shares here, I have decidedto wait – watching for any potential resolution between buyers andsellers and/or the next one or two earnings cycles to see how revenuetrends develop…

(Click here to read the rest of the article)

(Click here for an archive of GOOG commentary)

Be careful out there!

Full disclosure: no positions

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No Watershed Quite Yet for Solar Stocks $STP $LDK $FSLR

Last week, I suggested that the nuclear power crisis in Japan could usher in a watershed moment for solar energy and its constituent stocks. For all of two days, most solar stocks soared. For example, First Solar (FSLR) gained 14%. However, March 15th marked a sort of peak in themarket’s concern over Japan’s nuclear power mess, and, accordingly solar stocks have drifted downward ever since. Thereis only one solar stock on my list that has managed to stay aloft sincethat day: SunPower Corpration (SPWRA). First Solar has given back halfof its two-day gains. Several others have almost given back all theirgains. Clearly, the watershed still has plenty of capacity.

SPWRA is back in breakout territory

SPWRA is back in breakout territory

*Chart created using TeleChart:

Coincidentally, Queen’s University in Canada released a study March 3, a week before Japan’s earthquake, titled “Diverting indirect subsidies from the nuclear industry to the photovoltaic industry: Energy and financial returns” by I. Zelenika-Zovkoa and J.M. Pearce. The study has been heavily referenced on the web (for example, here: “Solar power outshines nuclear power: Study“), but Queen’s Univeristy’s own teaser says it all: “Nuclear power not worth the risk in Canada.” The study basically quantifies the indirect subsidy that nuclear powerreceives from the U.S. government from a $10B cap on liability foraccidents. Zelenika-Zovkoa and Pearce then conclude that this moneywould be better spent on subsidies for solar energy (emphasis mine):

“Nuclear power and solar photovoltaic energy conversionoften compete for policy support that governs economic viability. Thispaper compares current subsidization of the nuclear industry withproviding equivalent support to manufacturing photovoltaic modules.Current U.S. indirect nuclear insurance subsidies are reviewed and thepower, energy and financial outcomes of this indirect subsidy arecompared to equivalent amounts for indirect subsidies (loan guarantees)for photovoltaic manufacturing using a model that holds economic valuesconstant for clarity. The preliminary analysis indicates that if only this one relatively ignored indirect subsidy for nuclear power was diverted to photovoltaic manufacturing, it would result in moreinstalled power and more energy produced by mid-century.”

Elizabeth Kolbert recently gave a relatively “matter-of-fact” overview of the risks of nuclear power in the New Yorker titled “The Nuclear Risk.”

I am guessing these arguments likely hold a lot more weight north ofthe border. However, while Americans and the market in general yawnabout these possibilities, the opportunity remains to nibble away atsolar stocks. See “Another Solar Sell-Off and Another Round of Solar Buys” for my specific case for considering solar stocks buys on sell-offs. (See “Following the Charts Instead of the Bad News: Some Lessons from the Past Two Weeks” for my current perspective on the overall market).

Be careful out there!

Full disclosure: long FSLR, LDK, CSIQ, JASO, JKS, ESLR, short SHAW, long CCJ puts

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Another Round of Solar Stock Buying Opportunities $FSLR $JKS $SOL

Higher oil prices are not helping solar stocks. Instead, earnings disappointments and hand-wringing in Italy over solar subsidies and policy have put downward pressure on almost the entire sector. While it seemsthe second half of 2011 could be rough for solar stocks, the currentsell-off seems to be creating some buying opportunities.

First Solar (FSLR)
FSLR reported earnings last week. The company tightened 2011 guidance on earnings per fully diluted share (EPS) to $9.25 – $9.75 from $8.75-$9.50 and revenue (net consolidated sales) to $3.7-3.8B from $3.7-3.9B. Thesmall reductions at the top-end are a little disappointing, but otherthan that minor surprise, the results seemed to say “steady as shegoes.” FSLR sold off 5% the following day and is now down over 10% since reporting earnings. The stock has moved right back into the gap downcreated by October’s disappointing earnings results. However, given FSLR was as high as $175 ahead of these latest earnings, I think the current reaction reflects expectations that got too lofty. My upper valuation target on FSLR for the next 6 months remains $160 although the recent move to $175 provides additional upside potential from a technical perspective.

I listened to the earnings conference call and took note of a fewthings that stood out to me. I was most intrigued by FSLR’s descriptionof its ability to respond flexibly to a potential slowdown in Europeansales, especially in Germany and Italy, by increasing sales in otherregions. This capability is earnings management at its finest.

Highlights from First Solar Earnings Conference Call

  • Potential for a surge in projects in the first half of the yearahead of reductions in subsidies in Europe (especially Germany andItaly). This could cause a subsequent slowdown in the second half.Working to mitigate these risks as follows:
    1. Pricing in the 3rd party module business is sufficient to drive sell-through
    2. (As in 2010) use 4.2GW project pipeline in North America as a buffer against risks in Europe. Will also be increasing pipeline.
    3. Market development in North America, India, Australia, and China
    4. Flexibility is focused on 2nd half of the year – FSLR could go up to the 700MW range
    5. Driving lowest LCOE and maximize yield.
    6. Working to encourage policy in Texas and Florida to support sustainable solar projects.
  • Approaching grid parity in 2014 in SW USA projects where electricity costs are moving ever lower from 14-16 cents per kilowatt-hour. Gridparity is 10-12 cents per kilowatt-hour.
  • China has committed to growing a 20GW solar market by 2020.
  • Working on financing for projects, bonds.
  • Capital costs in Europe are steadily increasing.

I was surprised that Goldman Sachs raised its price target on FSLR to $190 on the heels of this report, but I am embracing the latestpost-earnings disappointment as another buying opportunity. I finallytook the plunge and bought back some FSLR as it retested its 50DMA. I am looking for a bounce from oversold conditions.

FSLR struggles to hold on to support as sellers push stock into oversold conditions

FSLR struggles to hold on to support as sellers push stock into oversold conditions

Jinko Solar (JKS)
JKS delivered great results and even better guidance.

JKS reported first quarter and full year 2011 guidance as follows:

“For the first quarter of 2011, JinkoSolar expects total solar moduleshipments to be in the range of 155 MW to 160 MW. Total revenues areexpected to be in the range of US$280 million to US$290million. TheCompany expects to increase its in-house annual silicon wafer, solarcell and solar module production capacities to approximately 900 MW each by the end of the first quarter of 2011.

For the full year 2011, total solar module shipments are expected tobe in the range of 950 MW to 1,000 MW. Total revenues are expected to be in the range of US$1.4 billion to US$1.5 billion. The Company expectsto increase its in-house annual silicon wafer, solar cell and solarmodule production capacities to approximately 1,500 MW each, as compared to its original guidance of 1,000 MW each by the end of 2011.”

The 50% increase over the original guidance for in-house capacitiesis quite remarkable! JKS apparently needs the capacity to keep up withthe expected demand. The revenue guidance for the first quarter is 20%higher than consensus and revenue guidance is as much as 50% aboveThomson Reuters consensus for all of FY2011 (consensus data frombriefing.com). So, it was no surprise that such a highly shorted stock (about 25% of float) gapped up over 11% in reaction to this news. Unfortunately, shortlyafter the open of trading news broke about reductions in Italy’sgenerous solar subsidies and down went JKS. It closed the down 4%.

The concern for JKS is understandable: 88% of Jinko Solar’s Q4 shipments went to Europe and half of that went to Italy. However, with a forward P/E under 5, price-to-sales just over 1, andprice-to-book a hair over 2, it seems a lot of risk is already pricedinto JKS. If I had sold my holdings at the post-earnings open (as I wasso tempted to do), I would have already started buying back in. As itis, I am just continuing to hold.

Will another post-earnings fade create deep losses again for JKS?

Will another post-earnings fade create deep losses again for JKS?

ReneSola Ltd (SOL)
Tuesday’s post-earnings sell-off in SOL was a very surprising event for this latest round of solar earnings.

2010 marked a return to profitability for SOL after two years of losses. So it is doubly disappointing that SOL started 2011 by issuing guidance below expectations: for Q1, SOL expects $310-330M vs. $342M ThomsonReuters consensus (briefing.com).

Chief financial officer Julia Xu explained SOL expects competition to crimp results:

“In 2011, we expect to face increased market competitiondue to additional solar capacities that had been added. Accordingly, wehave secured over 20 long-term contracts in 2010, representing 1.3 GW of expected wafer sales in 2011, while our in-house polysilicon production will satisfy approximately 30% of our internal polysilicon demand with a full-year average cost per kilogram between US$40 and US$45.”

With full-year shipment guidance of 1.6-1.7GW, SOL has a substaintial amount of its sales locked up. So, an exceptionally low valuation makes SOL a tempting purchase: forward P/E under 5, price-to-sales 0.8, and price-to-book 1.6. SOL has become a favored solar play for me, and I have been on the hunt to start buying back in. The stockis currently retesting the 200DMA and holding on, but with the 50DMAdirectly overhead, I will try to stay a bit more patient.

SOL attempts to hold on to critical support at the 200DMA

SOL attempts to hold on to critical support at the 200DMA

JA Solar (JASO)
I have been looking for an excuse to buy into JASO for a while. With a10% post-earnings sell-off on good headline results, I thought I had agood enough reason to start nibbling. I added one more tranche on Monday’s retest of the 200DMA.

JASO has locked in 90% of its shipment guidance for 2011, so I havebeen a little more aggressive than usual. It goes without saying that JASO has a low valuation: forward P/E under 5, price-to-sales of 0.7, and price-to-book of 1.1.

Here is JASO’s full 2011 guidance:

“Based on strong customer demand for JA Solar’s productsand a number of new customer wins, the Company currently expects totalcell and module shipments to exceed 2.2GW in 2011, representing anincrease of approximately 50% compared to 2010. Module shipments areexpected to be approximately 500MW to 600MW. Sales contracts signed todate for 2011 delivery amount to more than 2GW, representingapproximately 90% of the Company’s expected shipments for 2011.”

JASO is yet another solar stock attempting to hold critical support levels

JASO is yet another solar stock attempting to hold critical support levels

Satcon Technology Corporation (SATC)

Inverter companies were slammed hard this quarter, starting with German inverter company SMA warning about the impact of cuts in German subsidies. As late as September, SMA was still talking about a bullish near-term future. Subsequent reports from inverter companies also came in weak, but SATCreceived special punishment. SATC dropped 27% post-earnings and evenclosed below its 200DMA. I decided to take advantage of the firesale and start nibbling on shares.

SATC’s 2011 outlook included Q1 revenue guidance below expectations of $75.4M (briefing.com):

“Looking at the first half of 2011, we expect to see some seasonaleffect coming from the European region and the North American commercial rooftop business. However, we expect this slowdown to be offset bystrong sales into the North American utility-scale market, and ordersfrom our Chinese partnerships.

With a mix shift of sales from Europe to Asia, where ASP’s tend totrend lower, coupled with a higher proportion of our sales coming fromour newest technology, including the Solstice 500kW solution, which isnot yet fully transferred to our high volume Asian manufacturingfacility and Asian sources, we expect Q1 revenues to be in the range of$65 to $70 million with our gross margin between 25% to 27%…As we lookout to Q2, we expect a significant increase in volume from Europe andNorth America, and increased gross margin on improvements in our supplychain and greater utilization of our Asian manufacturing facilities. Weexpect to continue our run of operating profitability throughout theyear.”

SATC breaks down

SATC breaks down

*All charts created using TeleChart:

Shorts

While I have completed a full year of abstinence from shorting solarstocks, plenty of traders are still doing it. I have posted an update of the shorting activity in a select group of solar stocks. I have divided the charts into two groups to make them a bit easier to read. Note inparticular how short interest soared on SOL and JASO ahead of poorreactions to earnings.

Click graphs for larger views…

Shorts piled into SOL, JASO, and STP

Shorts piled into SOL, JASO, and STP

Shorts recently lost interest in FSLR and CSUN

Shorts recently lost interest in FSLR and CSUN

Source: nasdaq.com (for example, FSLR short interest)

Conclusion

My pockets are now more full with solar stocks than I expected afterthis round of earnings given the risks for the second half of this year. I am encouraged by the relatively strong guidance from most solarcompanies, but surely any miscalculation will have wide repercussions(like under-estimating the potential for cancellations or assuming onlyyour competitors are the ones who risk under-utilizing capacity).Waiting to buy on the dips mitigates the inherent risks of speculatingin what are essentially “hyper-cyclical” stocks, but it does noteliminate the risks. Now, I brace myself…

Be careful out there!

Full disclosure: long FSLR, JKS, JASO, SATC, ESLR (Also on the radar: SOLR, TSL, LDK, and SPWRA)

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GT Solar Plans Conservatively in Boom Times $SOLR

A few daysago I posted a piece on GT Solar International’s latest quarterlyearnings results and erroneously quoted material from a Seeking Alphatranscript for last year’s fiscal 3rd quarterconference call as if it were current. I apologize for the confusionthat caused. I have removed that article, and I am posting this piece as a correction and replacement. Interestingly enough, last year’sconference call was structured a lot like this latest one. Instead ofthe “bubble talk” I cited, this year, GT Solar (SOLR) referred to thecyclical nature of the solar industry to explain its conservativeplanning despite bullish industry projections for solar demand in 2011.SOLR anticipates a slowdown in its PV (photovoltaic) business in thesecond half of 2011 similar to the one it experienced, and feared, inthe second half of 2010.

SOLR also expressed caution about the demand picture in Germany,Italy and other European countries due to cuts in solar subsidies. Thecompany also expects some slippage in customer projects into late FY12or early FY13 given the aggressive nature of existing plans to addcapacity.

I was particularly eager to dig into SOLR’s results because themarket gave a very lukewarm reception to what I thought were decentheadline results and guidance. SOLR is still trading around the sameprice as it did before earnings. To update and correct my previouscommentary, I listened to the conference call and reviewed the earnings presentation.

For FY2011, SOLR tightened up the lower range of its guidance and increased the upper ranges ever so slightly:

Revenue: from $775-$850M to $835-$860M
Gross Margin Percentage: from 40-41% to 41-42%
EPS Fully Diluted: from $1.08-$1.18 to $1.15-$1.19

More importantly, SOLR’s preliminary guidance for FY2012 provides avery wide projection that includes the potential for flat revenue growth next fiscal year.

Revenue: $850M to $1B (YoY growth from -1% to to 20%)
Gross Margin: 40%-42%
EPS Fully Diluted: $1.25 -$1.50 (YoY growth from 5% to 30%)

Given the downside risks, I will assume that, in the best case, themarket will pay no more than about 10x forward earnings until we getmore clarity on the second half of the year. In the worst case, I willasume the market will only pay 7x earnings. These assumptions lead to aprice range over the next year of $8.75 to $11.50. In other words, SOLRmay already be fairly valued at current levels, and it may take apositive earnings surprise to push SOLR much higher from here.

Note well that SOLR’s guidance assumes that solar demand willmaterialize at the lower ranges of analyst estimates. This approachmeans there could be some upside surprises to SOLR’s results if solardemand remains robust. The likely slowdown in PV sales and the timing of revenue recognition for Sapphire systems generate the large variationin the guidance. SOLR expects to narrow its guidance in the nextconference call and provide more visibility into the second half of2011.

I sold my holdings in SOLR ahead of the conference call, mainly to reduce my overall exposure in solar stocks. With the market generally stretched and overbought, I am less comfortable holding a large amount of speculative stocks. I remain a buyer of SOLR on dips.

Interestingly enough, call buying in SOLR was very strong last weekwith heavy activity in the Feb 10 calls expiring this Friday. At onepoint last Wednesday, volume was 6,010 calls versus an open interest ofonly 1,230 calls. At the open on Wednesday, open interest was 2,022.

Here are some additional highlights from the conference call thatwere of particular interest to me (listed in the order in which thecomments appeared in the call):

  • Order rate has declined from prior quarters as anticipated.
  • Shipped a record (over) 480 DSS units.
  • A lot of technical advancements, including polysilicon equipment helping customers to meet new Chinese power usage regulations.
  • 2 customers generated 10% or more of SOLR’s revenue; the largest customer generated about 19% of revenue.
  • 98% of revenue (is still) from Asia.
  • R&D spending will continue to increase.
  • The $0.46 quarterly EPS last quarter was the highest in company history.
  • Cash and cash equivalents = $320.4M up from $294.2M last quarter.
  • Q3FY11 end cash balance reflects the use of approximately $203million during Q3 to complete the share buy back of 26.5 million sharesand draw down of $125M term loan facility during Q3.
  • Seeing some caution from customers about the sustainability of the current pace in solar demand
  • Passed on some orders, but have taken on large market share. Expectmarket share to be more normalized going forward (similar commentaryfrom last quarter’s results).
  • The PV side of the business is more of a book and ship.
  • SOLR has essentially trained its customers to plan for shorter leadtimes on DSS shipments. On the polysilicon side of the business, SOLRdoes not have customers who suddenly wake up one morning and realizethey have insufficient capacity: It could take 2 years to recover fromsuch a mistake.
  • SOLR will be a niche, specialty player in Sapphire equipment for now.
  • While shortages in polysilicon are materializing, expecting a lot of capacity to arrive over the next 18 months.
  • SOLR has had a breakout year in 2011

    SOLR has had a breakout year in 2011

    *Chart created using TeleChart:

    Be careful out there!

    Full disclosure: no positions

 

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GT Solar Posts Strong Results $SOLR

Almost two weeks ago, GT Solar (SOLR) reported a great quarter and provided good guidance. The earnings presentation provided increased guidance for FY2011 and preliminary guidance for FY2012:

FY2011
Revenue: from $775 -$850M to $835 -$860M
Gross Margin %: from 40 – 41% to 41 – 42%
EPS Fully Diluted: from $1.08 -$1.18 to $1.15 -$1.19

FY2012
Revenue: $850M to $1B (growth rate 2 – 20%)
Gross Margin %: 40% – 42% (flat)
EPS Fully Diluted: $1.25 – $1.50 (growth rate 9 – 30%)

SOLR ended the quarter with $320.4M in cash and cash equivalents,almost a 10% increase from the prior quarter even after using $203M tofinish buying back 26.5M shares and a draw down of a $125M term loanfacility.

Yet, the next day SOLR ended the day flat after trading down as muchas 5%. The stock went on to lose up to 10% over three days beforerecovering most of those losses.

I am guessing the extremely large range in FY2012 guidance was causefor pause. I reviewed the earnings conference call to look for anythingspecific that created any consternation. I discovered that CEO TomGutierrez used the dreaded term “bubble” when describing how currentmarket dynamics motivated SOLR to provide the large range in guidance.This discussion is important because solar manufacturers have respondedto robust demand with expectations for even stronger demand and a strong ramp in production capacities. Here is what Gutierrez had to say (from Seeking Alpha transcripts for the SOLR earnings conference call):

“I felt that it was important to give you a wide range of what I thought the possibilities were, but I think it will take another quarter or so for us to really understand whether or not these patterns represent a bubble of activity in the marketplace or whether or notthey can be sustained through the full large part of 2011, and that will drive which end of the range we fall into…”

“…Clearly what we were trying to project is if the industry goesthrough a bubble of orders and slows down, then we’ll have afront-loaded year and we’ll be at the lower end of that curve. We werealso trying to project the point that there are several contracts underdiscussion that could significantly change that scenario, regardless ofwhat happens in the second half of the year from an industry slowdownpoint…”

“…I think there is a couple of factors that I mentioned. One, thereis dislocation going on, capacity moving from higher cost regions tolower cost regions, and so you have a little bit of a situation wherecustomers that are able to produce high quality ingots and wafers at low cost are getting a disproportionate amount of new business…

…I think the other factor is, and it goes back to the behavior ofcompetitors, who have a view, a bullish view of the marketplace in terms of where it’s going to go to in 2012 and 2013 and very much like wehave the ability with our strong balance sheet to basically putourselves into the positions to deliver quickly. Okay, some of thecustomers that we’re working with have the capital to put themselvesinto the same position so that even if there is a dip in demand as yougo into fiscal ’11, you would see as it comes back they would be thepowerhouse in the industry to take the share and so I think we’re seeing behavior that’s based on the bullish view of some customers, relativeto how to position themselves for the next major upturn…

…we’re also seeing some activity associated with new entrants andwhich frequently happens I think in high growth industries which as newentrants enter the market once they believe that it’s real and there’sgoing to be long-term potential, they’re generally better capitalizedplayers and they jump into the market…”

SOLR happens to have a relatively high amount of low-cost producersas customers, so the company benefits from the above-describeddislocation in the industry. However, it seems Gutierrez is trying toreassure analysts that even if current demand turns out to be a bubblethat demand will robustly recover on the other end of the bubble’sbursting.

There was also some issue about the level of de-bookings, $50.4M inthe latest quarter. While the overall backlog remains a robust $857M,these de-bookings were a “sizeable” jump according to one analyst.

Under these circumstances, I am sketching out a very large $8.75 to$15 price range for SOLR over the coming year or so. In the best case,SOLR’s forward P/E is an incredibly cheap 7.5. Assuming SOLR can tradeas high as a 10 forward P/E, the stock has about 33% upside from current levels. If it turns out SOLR is riding a bubble that bursts soon,skittish investors might only pay 7x on the $1.25 in earnings. This 22%downside delivers a $8.75 stock price. This downside could of course beworse if a bursting bubble causes SOLR to miss expectations.

With the general stock market bouncing around overbought levels, I am very reluctant to over-commit to speculative stocks like solarstocks. I sold my holdings in SOLR ahead of February’s earningsannouncement. I am an eager buyer on deep enough pullbacks (and/oradding to existing positions in other solar names).

Interestingly enough, a surge in call buying activity occurred lastWednesday with over 6,448 Feb 10 calls trading against open interest ofonly 1,234 calls. At Friday’s close, open interest is 4,167 with 1,061calls traded on the day. The February put/call ratio on open interest in near-the-money options is a very low 0.28.

After trading in extended ranges, SOLR finally broke out in 2011 to multi-year highs

After trading in extended ranges, SOLR finally broke out in 2011 to multi-year highs

*Chart created using TeleChart:

Be careful out there!

Full disclosure: long JKS, SPWRA, WFR, and ESLR

 

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SunPower Breaks Out Ahead of Earnings $SPWRA

Despite my general caution on the stock market at current levels (it just flipped to overbought status on Monday), I continue to look out for bullish moves on individualstocks. This time, I found a fresh breakout candidate in the solarsector.

On Monday, SunPower Corporation (SPWRA or SPWRB) finally broke freeof a nine-month trading ceiling. The move has been a long time coming.

SunPower finally breaks out

SunPower finally breaks out

*Chart created using TeleChart:

This breakout is happening just ahead of earnings on February 17 andcould be an early sign of bullishness going into that report. The stockhas become overbought and is highly subject to a fade or someconsolidation before SunPower reports earnings. Admittedly, I hadlargely dropped SunPower from my radar after the company ran into accounting issues with its manufacturing operations in the Philippines and proceeded to lose about half its value in 2010. Now, I will be paying much closer attention.

SunPower’s stock is often interesting because of its enticingly low valuation (forward P/E = 8.5, price to book = 1.0, and price to sales = 0.8) joined with very high short interest (the 14.0 shares short are 28.5% of the float as of Jan 14, 2011). If SPWRA can report some good news or upsidesurprise, this combination can turn explosive as buyers rush to grabsome “cheap” shares and traders scramble to close out large shortpositions.

In the meantime, I will continue to cling to my shares with hopeful expectations.

Be careful out there!

Full disclosure: long SPWRa

 

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The Correlation Between Solar Stocks and Oil Prices $TSL $FSLR $WFR

OnWednesday, Wunderlich Securities issued a trading call on solar stocksciting a correlation with oil prices. First Solar (FSLR) was the primebeneficiary of this research. Eric Rosenbaum from TheStreet.com beat meto the punch critiquing this call in “Should Solar Stocks Trade on Rising Oil?“, but I will add my two solar panels anyway.

Bottom-line – do not buy solar stocks as a play on higher oil prices. In fact, just buy oil-related stocks to play higher oil prices. Solar’s main contribution to energy generation is electricity. So, solar’s main competitors are the fuels primarily responsible for electricitygeneration. Coal and natural gas are the twin powers in electricitygeneration in the United States and across the globe. According to theInternational Energy Agency (IEA), oil is only 5.5% of all electricitygeneration. Coal and natural gas combined are 62%.

Oil's contribution to electricity generation has fallen dramatically over the past 35 years

Oil’s contribution to electricity generation has fallen dramatically over the past 35 years

Source: International Energy Agency: 2010 Key World Energy Statistics

The U.S. Energy Information Administration’s Annual Energy Review 2009 shows oil is a mere 1% of the mix in the United States.

Wunderlich is focused on the recent strong correlation of First Solar to WTI (West Texas Intermediate) oil. However, the real story may bethat oil has had an unusually strong, positive correlation to the stockmarket. Given solar stocks have benefited from a stronger stock market,the correlation between oil and solar is more of a fortuantecoincidence. From Rosenbaum’s article:

“Pavel Molchanov, analyst at Raymond James, who coversboth traditional and alternative energy stocks, said that, historically, oil has traded in an inverse relationship to the equities market. Inthe past few years, that has not been the case, as rising oil priceshave coincided with rising equities prices. This correlation explainsthe rise of the price of a solar stock like First Solar amid a generalequities market and oil price upswing.”

So, over the past year or so, FSLR and oil have tended to go in thesame direction when looking at current prices. (Do not forget that FSLRis also part of the S&P 500 index). However, the day-to-day movesshow that this relationship is hardly tradable. In other words, if youhave a bullish outlook on oil, stick to bets on oil. The actualcorrelations using a daily time series show that First Solar has had aslightly negative correlation to oil (using XOIL, theAmex oil index) since April 1, 2009, right after the March, 2009 lows,and only a 0.48 correlation since the beginning of 2010. Theseunderwhelming correlations mean that there will be significant periodsof time where the First Solar vs oil trade has performed very poorly,and you could easily get stopped out of the trade. I expect these weakrelationships to continue.

I created a correlation matrix across my list of solar stocks andoil. For any two stocks with a correlation of 0.80 or higher, Ihighlighted the related cell in green. Click on the images for a largerview.

FSLR has had a negative correlation with oil since April, 2009

FSLR has had a negative correlation with oil since April, 2009

Even just over the past year, FSLR only has a weak correlation to oil

Even just over the past year, FSLR only has a weak correlation to oil

Note that since the stock market bottomed in March, 2009, only TrinaSolar (TSL) has had a strong correlation to oil (0.80 or higher). Thisoccurred given TSL’s extremely strong year in 2009 while oil was alsorecovering at a fast pace. Many solar stocks languished throughout 2009. Limiting the time window to correlations since 2010 drops even TSL from the list of strongly correlated.

Note also that given the size of the matrix of stocks in relatedindustries, we should expect to find at least two stocks, and likely afew more, strongly correlated to another just at random, so I am notmaking any general conclusions for trading. It could be interesting tospeculate on some of these relationships, but I will restrain myself for now.

Regardless, First Solar (FSLR) has done well with all the analyst attention it has received lately. It is now trading just above my $160 upper limit for the presumed trading range. Shorts are as bearish as ever with 31% of FSLR’s float traded short as of Jan 14, 2011. The total shares short have remained around 16M since the end of November. I highly suspect the next round of data will show shorts closing outpositions in the wake of this rally. If not, particularly if shorts have decided to double down, I suspect FSLR will retain extra fuel to powerhigher on this momentum.

Be careful out there!

Full disclosure: long TSL, SPWRA, WFR, JKS, ESLR, USO (with a covered call), and SSO

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Bears and Bulls Battle Over First Solar Shares $FSLR

On Monday, Goldman Sachs added First Solar (FSLR) to its conviction buy list with a $165 price target. The market’s response was swift with FSLR ending the day up 6% and aclosing price of $156.40. I wish I had received the memo because I sold off the last of my FSLR positions on Friday.

Buyers push FSLR to a strong one-day 6% gain

After FSLR provided earnings guidance last month, I set my own price targets on FSLR:

“If we assume that the market in its most giddy mood will pay no more than a 17 forward P/E for FSLR, then that generates a $162upper price target. That price target neatly coincides with the highsfrom the fall of 2009. If we assume that the market in its mostcantankerous mood could drop FSLR to a 12 P/E (highly unlikely in myopinion), then that generates a $105 downside risk. This target lowneatly coincides with a floor for FSLR that has endured for over threeyears. I think the most likely range is $120-150 until a new catalystarrives to move the stock.”

I will count Goldman as a fresh catalyst. However, the stock is nowonly 6% within Goldman’s target (and within 4% of my presumed valuationtop), the risk/reward for fresh purchases seems pretty poor here. Thegood news is that this upgrade uncorked additional pent-up demand forsolar shares that sent stocks throughout the sector soaring.

For a somewhat ironic reference, I have posted a CNBC segment from Friday with Herb Greenberg hosting a bull vs bear discussion on solar. The solar bull, Jeff Osborne, Managing Director at Stifel Nicolaus, was far from a raging bull. Osborne offered up Ja Solar (JASO) as arecommended sell, and he timidly offered up GT Solar (SOLR), Satcon(SATC), and FSLR as his buy recommendations (see my SOLR commentary here).

Gordon Johnson, from Axiom Capital, is a longtime bear and makes abasic supply versus demand argument: PV production capacity will go from 20GW to 40GW this year while demand will increase at most from 15 to18GW (First Solar assumed 15GW demand for 2011 which matches the projections back in May from the European Photovoltaic Industry Association). Greenberg was looking for a head-to-head fight and tried to generate one over First Solar.

Be careful out there!

Full disclosure: no positions (my last solar position is long JinkoSolar and as I have stated in the past I no longer have any interest inshorting solar stocks. This stance began last February with First Solar.)

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