Adjusting Portfolio to Latest Fire in Solar Stocks

September has been very kind to solar stocks as most have awakened from summer doldrums and slumber to rise with the rest of the soaring stock market. This new raging fire has motivated me to get more active in trading solar stocks as well, even as it has sometimes been very difficult to keep up with news flow and price action.

Below is a summary of where I stand across the solar spectrum. A significant correction in the stock market is the greatest short-term risk for all longs. (The speculative frenzy of the past two weeks sure feels like some kind of crescendo!)

First Solar (FSLR)
I have actually been very active in FSLR ever since I flagged it as a short based on massive stock sales by insiders. FSLR’s last bottom dropped below my $130 target, and the current bounce has marginally passed my relief rally target of $145-150. September’s bounce has shaken FSLR out of strong sector under-performance over the past several months although it still remains in a downward trend from the May highs.

The chart below captures some of the technical dynamics of FSLR’s price action (captured before shortly before market close). Most importantly, the last two days have been quite bullish given FSLR has zipped right by an island top formation and is back above both the 50 and 200-day moving averages (DMAs). Note also that today’s expiration of September options had almost the exact reverse impact on FSLR as August’s expiration. In August, there had been heavy put buying at the 125 strike and sellers stepped in with force on expiration day to push FSLR to $121.54. Today, buyers kept FSLR aloft around $156.

First Solar bounces sharply in September
First Solar bounces sharply in September

Since the bounce, I have shifted the core short position to a hedged position and have sold calls as the overall position has moved from net short to neutral. I have been quite surprised at how profitable the calls have been, and, of course, wish that I did not have the core short position in the first place. However, my “fair value” target remains at $130, and I now suspect that the March lows will eventually be re-tested.

My current speculations on potential outcomes for FSLR:

  1. The next earnings report confirms FSLR’s margins are or will be declining faster than expected. I consider this highly likely.
  2. FSLR does a secondary offering of stock to make sure it has enough capital to promote the construction of solar farms. These utility-scale projects are absolutely critical to FSLR’s future as the company looks to promote factory throughput and lock up pricing. I consider this “somewhat likely.”
  3. Absent a secondary, FSLR gets acquired by a large industrial firm (like GE or Siemens). Such a move then explains the recent hiring of its new CEO from Honeywell and why FSLR paid so dearly for him. I consider this a “worst case” scenario for holding a short position.

SunPower Corporation (SPWRa)
As promised, I purchased SPWRa for a long-term buy this month. I picked up shares after the stock bounced from September lows which happened to fill the large 29% gap from July’s earnings. However, I sold the shares much earlier than I expected as the profits were too tempting once SPWRa recovered the highs from earnings in just two weeks time. Going forward, I am a buyer on dips on SPWRa. I continue to prefer its “reasonable” valuation.

My biggest speculation for SPWRa is that it lands its own Chinese solar utility deal as the Chinese continue to allay concerns about a solar trade war. Such a deal will be the second, and last, large-scale utility deal China grants to an American company before it focuses on building its own domestic capabilities.

SPWRa has been on a very wild ride
SPWRa has been on a very wild ride

Suntech Power Holdings Co LTD (STP)
My favorite short-term solar trading vehicle has now become a long-term one. As I mentioned in an earlier post, I think the FSLR utility deal speaks volumes about the kind of largesse China will extend to its own domestic solar companies. I expect STP to be a major beneficiary, and I am now accumulating shares. I am hoping the current glut in solar panels takes it down so I can accumulate at much lower prices. STP remains in a 5-month trading range, and if/when it breaks out, it could quickly double in price. I executed poorly on some Sept 17.5 calls I held for a short-term trade that I let run into expiration. Sales of Sept 15 calls earlier this week recovered part of these losses. I rolled into Oct 17.5 calls as well.

STP could be coiling for a big move
STP could be coiling for a big move

Energy Conversion Devices (ENER)
I executed poorly on the short put spread and held until expiration, costing me the full potential loss (albeit small). However, I was fortunate enough to flip calls on ENER three times to more than make up for the difference. I bought some more calls for October expiration in case the current spike on buyout hopes continues into the next 30 days. Without these rumors, ENER will likely fall right back to fresh 52-week lows in a hurry and shorts will reload in a hurry (one big reason I am buying calls and not shares).

ReneSola (SOL)
SOL is the latest addition to the portfolio. This position is strictly a speculative play that piggybacks on last week’s extremely heavy call activity in the October 7.5 calls. I consider the current 3-month consolidation pattern a prelude to a continuation of the strong May to June run. Being a Chinese solar company sure helps as well.

Is SOL coiling before next big ramp?
Is SOL coiling before next big ramp?

*All charts created using TeleChart:

Given how full my solar plate is now, I am waiting for the next earnings season before (potentially) buying Trina Solar (click here for a review of last earnings). My expectations for a significant correction in the stock market this fall also prevent me from getting overly aggressive. I continue to hold positions in Arise Technologies, Solarworld, TAN, and 5N Plus, and I have made no changes in many months.

Be careful out there!

Full disclosure: net short FSLR; long STP shares and calls, long SOL calls; long Solarworld, TAN, Arise Technologies, and 5N Plus.