Solar Fallout

By Dr. Duru written for One-Twenty

September 10, 2008

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The recent collapse in prices in solar stocks has moved most solar stocks back into correlation with oil prices. My missive on September 1 observing the divergence between solar stocks and oil prices now appears very ill-timed! To dramatize the rapid shift in just a week's worth of trading, I have altered last week's table to compare the change in price in solar stocks from the recent peak in oil prices to the end of August 29 and to September 9. The six strongest solar stocks at the end of August remain the strongest and only 4 solar stocks remain in the green since oil peaked. 4 stocks are down as much as oil (oil is down around 33% from the recent peak).

Solar Stock Symbol Price Changes
Oil Peak to August's EndSince Oil Peak
CSUN 55%8%
LDK 50%10%
STP 40%7%

The sell-off has come amidst a broader stock market sell-off that has struck technology, commodities and energy, and infrastructure stocks particular hard. Solar stocks cut across all those segments and have not been spared the wholesale dumping that is underway. It is difficult to single out cause and effect given these parallel moves, but I wanted to point out one dynamic that I completely missed at the beginning of this month. I failed to note that last week solar enthusiasts gathered in Spain for the European Photovoltaic Solar Energy Conference. Surely, the nice momentum we saw in August in solar stocks was partly in anticipation of good news from the conference. Combine that with the relatively good showing several solar stocks made after announcing earnings, we had a pretty good recipe for building excitement. In other words, the market set itself up for disappointment. In fact, the conference delivered its share of sobering news to participants. This disappointment has been exacerbated by all the negative factors weighing on the markets now.

Five stocks from the above list made new 52-week lows this week: ASTI, AKNS, TSL, YGE and ESLR. WFR has been making new 52-week lows since July with the latest drops coming on the heels of a pretty bad earnings warning. (Note that the two solar ETFs, TAN and KWT, also plunged for major new all-time lows). The increasing number of 52-week lows is a very bad sign for the sector overall and indicates an increasing likelihood that more will follow. I have written about ESLR several times in the past, and ESLR's current plunge to prices last seen three years ago (see chart below) loudly confirms my assessment at the end of July: "ESLR is back to "show-me" status. Its chart (not shown here) is a mess with numerous points of upward resistance. I see little reason for it to break out of the $8-13 range anytime soon." It is amazing to see a company that has now built up billions of dollars in backlog has performed so poorly. We should assume that "something" is wrong and now seriously broken with the story. I would not be surprised to start hearing about cancelled contracts and similar surprises.

Evergreen Solar

However, pointing out my correct bearishness on a solar stock during this sell-off is like taking pride in predicting that the homes of two of my neighbors will get wet in a coming tropical storm. Everyone in the city will get pounded. Instead, let's look ahead to see whether there is any opportunity.

After I closed out my earnings trade in FSLR at the end of July, I stated: "I think it is very likely that FSLR stays stuck in a wide range from $200-$230-$330 or so as it grows into its valuation." FSLR is now teetering right on $200 after rapidly breaking down through a five-month trading range. FSLR is now down over 33% from its 52-week highs, and it has suffered some of the worst technical damage of the bunch. FSLR seems likely to challenge the 2008 lows around $150. Before then, I expect it to bounce sharply back into resistance. Note well how it gapped up strong on Monday right to this resistance and then sold off non-stop for an incredible 18% two-day loss. I think FSLR is a stock to short (I have already closed out such a position), especially as part of a pair trade with another solar stock (long), given its premium valuation in a market that is less and less willing to pay high prices for risky merchandise. The selling has occurred on higher and higher volumes. See chart below.

First Solar

One thing happened last week that had me going back to my original warnings on FSLR in June. Three top executives have initiated pre-arranged stock trading plans which allow for buying and selling stock at pre-determined times between November, 2008 and November, 2009. After previous executive sales have provided overhang, I expect these sales to do the same. Finally, on Thursday, FSLR experienced unusually high call volume yet it still closed the day down 4%. Given the key technical level at the 200DMA and the on-going sell-off in solar stocks, I guessed that this activity more likely represented shorts clamoring into FSLR looking for hedges to their positions. Those calls have now been obliterated. If there truly is some bullish news that traders are trying to anticipate, then we should see them step up to the plate for a fresh set of calls. I doubt it though. Instead, I figure shorts will try to press their bets here.

Last week, I mentioned a series of additional solar stocks I wanted to target for longs and shorts. I will not update charts and just give a brief status summary:

  1. STP has now closed its earnings gap from August and has now experienced a strong fade from a move that took it up as high as 27%. After failing at the 200DMA, I declared STP to be a short. That worked out well and the trade is closed out. I still think STP can and will go much lower from here.
  2. SPWR remains my favorite solar stock for now. Last week, I declared I would not look to get long until it tested the 200DMA or filled the gap up from August's great contract news. Well, Tuesday, SPWR crashed through THREE forms of support: the 200DMA, then the gap, and lastly the 50DMA. I am suddenly no longer as enthusiastic about making a short-term play here. I will be waiting to see some more of the selling shake out. I might look to combine a long in SPWR with a new short position in FSLR.
  3. ENER has been a huge post-earnings disappointed. I added to my small position as planned, but the stock has now fallen through its trading range. While I originally had stated I would stop out the trade at that point, I instead decided to purchase put protection at that point. That worked out very well, but the overall trade is still in the red.
  4. LDK collapse has brought it all the way back to its August earnings gap. The call that I bought has long since gone to zero. I will be looking to see how LDK behaves if it closes the gap around $34.25. However, like STP, I now think it is in great danger of going much lower from here
  5. TSL has crashed to new 52-week lows as expected. My puts on TSL have delivered green, and I will be looking for more selling in the coming week or so.
Clearly, with all the solar stocks falling hard in tandem, it made little sense to try to pick and choose longs amongst the shorts without at least a more coordinated pair trade or hedge strategy. Another lesson learned there. Solar remains correlated with oil, and solar stocks remain even more highly correlated with each other! It also goes without saying that my few long-term solar positions have almost all suffered heavily this month. I will likely wait out the current storms a bit more before deciding whether or not to add to those positions (at this rate, I might be talking early 2009!).

For some additional interesting viewing and reading, check out Zach Karabell on CNBC's Fast Money insisting that the selling in solar has gotten way overdone (click here). He connects this trade to the global growth story in energy. Barron's Eric Savitz tries to explain what's currently wrong with solar stocks by pointing to various (but conflicting) analyst commentary. I like my explanation better (=smiles=), but I do agree that the stronger dollar is now one more overhang for a solar industry that so heavily depends on European sales.

Be careful out there!

Full disclosure: Long ENER, TAN, USO; short TSL. For other disclaimers click here.

DR. DURU®, 2008