Wednesday, October 17, 2012

FSLR: Solar flare

Pres. Obama last night, during the second presidential debate, again made his pitch for alternate forms of energy to replace the fossil fuels that dominate our global economy.

First Solar Inc. (FSLR), which makes and sells power systems fueled by sunlight, celebrated by breaking above its 20-day high, triggering a Turtle Trading bull signal. The company also announced that it was building a solar power plant for the electric utility in Dubai, which may have had more to do with the rise.

The breakout is confirmed by a rising relative strength index that stands within six points of the overbought line.

I'll say up front that under my rules, I can't trade FSLR today. The company publishes earnings on Oct. 25 (or Oct. 29, another brokerage says), less than two weeks from now, and I don't open positions within 30 days of earnings. So if I play FSLR post-earnings, it will be based on trend and resistance rather than the Turtle analysis.

Yet, it's a company worth watching. If Pres. Obama win election, the solar industry will be near the front of the line for a lot of government support. If Gov. Romney wins, the goody supply will decline. That reality alone provides an element of volatility for the next six weeks, until election day.

And volatility in the mother of profit.

The break above the 20-day high, $24.60, brings the price close to the 55-day high, $26.31, which forms the ceiling of a sideways trend in effect since early August. The $26.31 level is key resistance, and a break above that level would be a strong sign that the uptrend was resuming.

FSLR on June 4 ended a steep and deep decline that began the prior year, hitting $11.43. From that point, which was between earnings, it rose and established a sideways trend with a $16.42 ceiling, and then in early August rose again, in conjunction with earnings, to the present trading level.

Some stocks trend easily. FSLR appears to be one that moves by fits and starts.

FSLR in anything but a darling in the eyes of analysts. Their enthusiasm stands at a negative 60% on the index. True, this is down from 77% three months ago, but still, it's pretty abysmal.

I don't entirely understand why the analysts are so angsty.

True, it's new tech, but remember how companies were rated during the tech bubble. True, it's an industry that is subsidized to an extent, but remember GM, and further back, Chrysler. Or the oil industry, for that matter.

None of those factors has been an automatic deal killer historically.

The return on equity is pretty good, at 12%. Long-term debt is pretty low, at 14% of equity. I've seen companies doing a lot worse that analysts loved.

It is true that annual earnings stumbled into a loss, of under 50 cents per share, in 2011, ending a rise of at least three years that peaked above $7 per share. And 2012 quarterly earnings have been down from prior years.

But that's not unusual for new tech.

Institutions own 66% of shares, and the price is below par: It takes 67 cents in shares to control a dollar in sales.

FSLR on average trades 6.6 million shares a day, sufficient to support a wide selection of options strike prices with open interest running at three- and four-figures near the month. The front-month, at-the-money bid/ask spread on calls is very narrow at 1%.

Implied volatility stands at 93%, near the middle of the six-month range. It has been stair-stepping upward since late September. That is an extremely high level of volatility, around six times that of the S&P 500.

Options are pricing in confidence that 68.2% of trades will fall between $18.42 and $31.92 over the next month, for a potential gain or loss of 27%.

Options are hot today, running at 163% above their five-day average volume. Calls lead slightly at 186% above the average, compared to 136% above average for puts.

Today's fair-price range on the 30-minute chart runs from $24.85 to $25.52, encompassing 68.2% of transactions surrounding the most-traded price, $25.14. A second, higher most-traded level, around $25.50, is running a close second.

With 90 minutes before the market close, FSLR is trading just below the most-traded price.

First Solar next publishes earnings in late October, maybe Oct. 26, or maybe Oct. 29 -- my brokers disagree, the company website is no help.

Decision for my account: As noted above, I won't be trading FSLR until after the earnings announcement. I'll take a look at it in early November.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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