Tuesday, February 16, 2010

First Solar Earnings: "Trading the Main Event" (FSLR)

UPDATE: "Solar Stocks Lift On Latest Twist In German Subsidy Saga" (FSLR).
Original post:
The stock is up 90 cents at $116.00 in pre-market trading.
First solar will be reporting their fourth quarter and year end after the close on Thursday February 18.
The only surprises I can envision would be negative. The December 16th 2010 outlook conference call was the high water mark. No one was impressed. The stock had an intraday high of $142.66 the day before and made a double top on January 7, trading as high $142.46.

We actually know something about this name:

On December 14: "First Solar 2010 Guidance Webcast Details (FSLR)":
The last time they had one of these get-togethers we exited a short position, the stock went up eight bucks and we re-entered the short....
In the December 16 post, "First Solar Announces 2010 Guidance and Capacity Expansion Plans (FSLR)":
No time to listen to the call, I'll do that tonight. The stock is up $7.76 at $144.50 in early after-hours trade.
Two things to remember: 1) After the June call the stock was up $8.00 and then resumed it's downtrend. 2) Our target was the top of the Oct. 28 earnings release gap, $151 or so....
On December 17 I wrote:
In early pre-market trading the stock is up a weak $1.26 at $136.74. For the stock to continue the up move we'll have to see more strength today or we're looking at an opportunity on the downside.
Combined with the muted response to yesterday's analyst get-together is the debacle in Denmark which could have a serious psychological effect on a subset of investors in the alt-energy space.
A few hours later:
The stock has to perform today or face a potential breakdown. It's currently come back from the day's lows at $135.99, down six bits....
December 18: "BUY OR SELL-Does First Solar's forecast make it time to buy? (FSLR)":
As I said yesterday, if FSLR doesn't start performing, it risks breaking down. On Thursday the stock closed down 7/10% versus the Nasdaq's 1.2%. That outperformance has reversed this morning with the Nas up 1% and FSLR down 4/10% This kind of action is is very negative considering the dog-and-pony spin on Wednesday....
All this followed the Dec. 8 post on the run-up to the Copenhagen conference ($133.25):
Here's the three month chart (from BigCharts) with the 50-day SMA. You'll note the stock is well into the gap from the last earnings report. I'd expect the stock to approach the top of the gap leading up to the analyst webcast on Dec. 16, aided by a tailwind from the hoopla in Copenhagen. The COP 15 meeting ends December 18. Then I am outta here....
Here are some general thoughts from Schaeffer's Research:
The following article, written by Bernie Schaeffer and Todd Salamone, is from the fall 2009 issue of Bernie Schaeffer's SENTIMENT magazine, which is designed specifically for those interested in trading options. Every issue of SENTIMENT includes educational pieces for newcomers to options trading, as well as advanced strategy stories to help experienced traders build their portfolios. Please click here if you would like to receive your own copy of the next quarterly issue of SENTIMENT.

The American Heritage Dictionary of Business Terms defines "event risk" as "the risk that some unexpected event will cause a substantial decline in the market value of a security."

We would expand upon this definition on several fronts. Events such as takeovers and earnings reports can cause stock prices to make huge, fast moves—in either direction. In the traditional, old-line investment world, it might make sense to define the associated "risk" as a substantial decline in the share price. But in the modern trading world with its hedge funds and short-term traders, who may as easily be holding short positions as long positions, and with the added flexibility investors have to profit on bearish views by buying put options, event risk is now "an equal opportunity" phenomenon. A sharp reaction to the upside could be at least as devastating to a short seller or a put holder as a sharp decline would be to a stock or call option owner.

In addition, the dictionary definition of event risk refers to an "unexpected" event. We all know that events (mostly bad ones) can occur out of the blue—terrorist attacks, wars, natural catastrophes, and corporate takeovers would be prime examples—but there are also market-moving events that are scheduled well in advance. The most common are quarterly corporate earnings announcements, but there are others that can have a huge market impact. Our good friend Paul Montgomery, whose weekly Universal Economics market analysis we find to be the most compelling in our business, refers to these events as having "dates certain." As Paul described to us recently:

"What I call 'date certain' is a future date, known to virtually all market participants, that is commonly believed to have significance for the markets. Probably the classic example was January 16, 1991, which was the deadline date George Bush Sr. had given Saddam Hussein to abandon Kuwait. The whole world knew about, and watched, that date for six months. Then exactly on that date the troops started to move, and the stock market exploded into one of the strongest bull runs ever."

You Know More Than You Think

One fascinating aspect of "date certain" events is that even though they can have an explosive impact on a stock or on the market, you as a trader can plan your strategy in advance and execute it just before the event is scheduled to occur. This means that you can position yourself to achieve big profits in a very short time period—often in less than a full trading day. And such situations can be particularly attractive for option buyers (due to the added leverage and the reduced dollars at risk) versus an outright purchase or short sale of the stock....MUCH MORE

The solar stocks have seriously underperformed the NASDAQ over the last ten days:
Here's the 10-day comparison of the solar ETF (TAN) vs. the Nas via BigCharts: