MEMC Electronic Materials Quickly Recovers from Earnings Warning

Two days ago, MEMC Electronic Materials (WFR) issued a late earnings warning stating that it “…experienced a disruption in production at its polysilicon facility in Pasadena, Texas due to an equipment failure on August 7, 2009, requiring a large portion of the facility to be shut-down…The lost production and related costs are expected to negatively affect the company’s revenue and margins in the third quarter of 2009. ” The stock closed down on the day by almost 4%. Since then, buyers have stepped in with notable volume. WFR has now recovered all its post-earnings losses and at the time of writing is up another 4%.

Normally, I would not think much about this action, especially since WFR’s business is under pressure from falling poly-silicon prices. However, last week, Nick Perry from Schaeffer’s Investment Research, reported heavy call trading volume on WFR. The volume was so impressive, I also decided to jump in with the herd (my analysis on options trading volumes suggests that the signal can be quite ambiguous unless the trade follows prevailing trends. WFR is currently stuck in a 5-month trading range, so this play was a stretch for me). Now that buyers have shown they are willing to look past the latest operational problems at WFR, I am even more intrigued by this trade and anticipating higher prices in the coming week.

Be careful out there!

Full disclosure: long WFR calls