Two Solar Stocks, Two Different Approaches

People buy stocks for one of two reasons. Either they believe in the long term prospects of the company or they see a pattern that suggests that short term gains are coming, regardless of their long term view of the company. They either are looking to invest or to trade. The solar power industry has been seen as ideal for both approaches at different times. During the irrational exuberance about the industry in 2007/8, traders ruled. Now the first approach, investing for the long term, is more common. Solar is seen as an industry of the future, that must continue to grow, but trading opportunities still present themselves at times.

Take Solar City (SCTY), for example. There are plenty of long-term believers in this company. Elon Musk is, after all, the Chairman of the company. On balance I would probably put myself in that camp, but until the company has demonstrated the ability to consistently make money I can understand those that would not. Solar City’s preferred lease agreements make it difficult to assess the company’s performance by conventional metrics as it involves upfront costs and deferred payments, but the rapid growth that has made them the largest domestic solar supplier in the U.S. cannot be denied.

Whatever you think of the fundamental case for SCTY, it is hard to ignore the technical case for buying the stock here. If your eyes glazed over when I used the word “technical,” don’t worry. The kind of technical analysis I favor does involve looking at a chart, but not for some obscure pattern or numerical coincidence. It is as basic as it gets.

The above is a 1 year chart for SCTY with two big, gold horizontal lines drawn. Those lines represent the range within which SCTY has been trading for the last six months. One thing we know for sure about range-bound stocks is that eventually they will break out, and a risk controlled trade that takes advantage of that is often too good an opportunity to pass up.

In this case the support at the bottom of the range is more clearly defined than the resistance at the top and has survived multiple tests. That doesn’t make it a certainty that the stock will break to the upside, but makes it more likely that the base will hold in the event of any future weakness. Proximity to the low means that, by buying here (around $50 at the time of writing), a stop loss to protect against a breakout to the downside would limit potential losses to around 10%, while a break above $60 would clear the way for a move up to around $80, a 60% profit target. If that target is approached, buyers would then have to make a choice; either stick with the original plan and cut and run, or, if you believe in the company, convert at least some of your holding to a long term position.

That decision would depend on a fundamental analysis at that time, but there is one solar company where fundamentals even now suggest buying and holding. For years the knock on solar power was that the companies in the sector all had potential, but none of them made money. First Solar (FSLR) has been the exception to that rule for some time, turning a profit in seven of the last nine years.

They haven’t squandered that cash, either. They have built up a balance sheet that is remarkable for the industry and could even be considered strong from a broader perspective. FSLR carries around $217 million of debt with nearly $670 million of EBITDA from 2014 and cash or equivalents on hand of approximately $2 billion. The survived a period of aggressive dumping into their market by China a few years ago and have put themselves in a position to survive pretty much anything.

It is not unreasonable to expect, now that stability is achieved, for them to focus on growth over the next couple of years. The stock currently trades at a P/E of 15.87, which, while representing a discount to the broader market, isn’t a screaming bargain. That number, though, is based on analysts’ estimates of only 3% growth in the next 12 months. It wouldn’t take a lot of shift in focus to beat that number and in that case FSLR will look remarkably cheap very quickly.

In the past, as governments who supported the industry came and went, solar power stocks have generally been better suited to a trader’s style than an investor’s. Long term growth has been illusive; FSLR, for example, was trading at around $60, right where it is today, in March of 2007. There have been some wild swings and a distinctly frothy patch in 2007/8 before the recession, but that was based on optimism, not results. Some young companies in the field, such as SCTY, are still best suited to that style, but more mature companies, like FSLR, can be judged on the boring old metrics of financial stability and their ability to make money. Either way, the solar power industry still offers ways to make money.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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