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I have never been so long-term bullish and short-term bearish on a sector as I have been on solar stocks. Solar energy is full of promise as an increasingly important part of our energy solution over the coming decades, but the prices of too many solar stocks are discounting and presuming too many successes with flawless execution too far into the future. Some folks are no doubt surprised that solar stocks are not performing better given this year's large spikes in the prices of oil, coal, and natural gas. This alone should serve as a warning that the short-term thesis on solar stocks is faltering. For example, imagine what might happen if commodity prices correct. Another disturbing pattern I have observed during the last two earnings cycles is the tendency for solar stocks to fade hard after earnings, even after reporting what appear to be stellar headline earnings and future guidance.
I will tell my own tale of warning by picking on two solar stocks in particular: First Solar (FSLR) and Evergreen Solar (ESLR). (Note that I am or recently have been long and/or short each of these stocks. I am also long Solarworld (executive insider buying first got me interested) and Arise Technologies (for some speculative juice). See my disclaimer here).
First Solar has been the darling of the solar industry, mainly because of tremendous earnings and revenue growth, a rabid fan base, and a presumed competitive moat created by its industry-leading thin film technology (Cadmium Telluride or CdTe). Of the pure play solars, FSLR is one of the few to actually make new all-time highs in 2008 after the solar craze reached its pinnacle at the end of 2007. JA Solar (JASO) is the only other stock to achieve such heights, but its new closing high lasted just one day (April 18). (Correction on June 17, 2008: Canadian Solar (CSIQ) achieved new all-time highs in May and has held on! Thus, at the time of writing, I believe CSIQ was the only pure play that traded in 2007 to achieve and hold new highs.) Ever since FSLR's last major run took it up over 50% into its April 30th earnings call, a lot more negative chatter has been printed and reprinted. Renewed doubts about the stock and the business have weighed FSLR down 23% from it's all-time high. The negative chatter has often been sharp and sometimes cynical, and the defense of FSLR has often been passionate. We should expect no less from a stock that is priced at such a premium. For now, the bears on FSLR have the upper hand and the chart technicals are on their side. I will start with there...
The weekly chart shows that 2008 has been a wild and choppy ride for FSLR, suggesting a damaging break in the momentum.
The daily chart makes the short-term bearish outlook clearer. A dangerous downtrend has been in place ever since the all-time highs were established in mid-May.
It seems that the top is in for now in FSLR. Until proven otherwise, the short-term trend is down. If FSLR retests the 50DMA (around $273.50) a classic shorting opportunity may arise. A fauilure there will all but confirm FSLR's top for some time. The one positive about FSLR's chart is that on-balance volume (OBV) has remained strong, even during corrections.
So, what are the more fundamental reasons that have caused FSLR to falter? Well, the news outlets and analysts have actually covered most of them very well. One June 8, 2008, the Toledo Blade provided an excellent account of the good and the bad sides of this drama: "Analysts cool on First Solar: New competitors, high stock price spur ratings dip". I will add to this my own list of what I think is important to consider, some of which the article covers. There are other issues I have seen raised that I will not cover here and are not covered in the article (such as the risk of lower ASPs and margins). Do not take these negatives to mean that FSLR's business is finished. Far from it. Match these issues with the high valuation of FSLR's stock and ask why should we pay such a price alongside such high risks?
In case you wanted something positive in this missive, here is an upgrade from hold to buy by ARGUS which attempts to allay some of the fears I expressed above. Price target of $292. Argus slapped a hold on FSLR at the beginning of April. Nevermind that FSLR was around the same price then as it is today.
OK. Now, on to Evergreen Solar (ESLR)...
ESLR is perhaps the one pure-play solar company with the longest record trading as a public company. The company gets major kudos just for surviving the public markets for almost seven years. Several semiconductor companies that now serve the solar industry have been public even longer, but they have multiple business lines, including Applied Materials (AMAT), Energy Conversion Devices (ENER), Memc Electronic Material (WFR), and Emcore Corporation (EMKR). ESLR went public in November, 2001 and within a year it was flat on its back trading around 50 cents/share. Ever since that nadir, the company has fought and struggled its way back, never making any money but always making promises. By 2006, ESLR had finally regained its opening day IPO price. Within a year, it received another 50% haircut. ESLR rode 2007's solar craze back to that same high price. ESLR has now made a long-term triple-top, and the time to perform is almost now or never. The chart below shows the wild, multi-year ride and potential triple top.
ESLR is indeed trying to perform by reporting last quarter what I believe was its first quarterly profit ever. A month later, ESLR followed up with the amazing announcement that it had signed new sales contracts valued at $1B. The stock responded by a pop of 20%, 33% at its peak. But as of June 10, ESLR has returned all that excitement back to the sellers. See the chart below:
If the fade on that first day did not convince you that "something" is wrong, this complete fade should. How could $1B in new contracts not create more sustainable excitement? Especially when ESLR's CEO Richard Felt got on Fast Money and claimed that demand for solar is "virtually infinite"? Well, before this announcement, ESLR had six customers with $850M in order backlog, and ESLR has just now recorded a profit. The new contracts exceed this amount, are from just two customers, and extend through 2013. We can only imagine that there is a lot of execution risk here. Perhaps once ESLR starts to deliver successfully on all this backlog, a skeptical market can begin to believe. The charts have provided your technical levels of proof. First, reconquer the $12 price mark. Next, establish and hold new all-time highs. You aggressive types can start your bidding now...
Be careful out there...!