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3 Solar Trades Searching for a Silver Lining

Make these plays while the solar losses pile up

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With austerity measures cutting heavily into government subsidies, the solar sector has taken quite a pounding so far in 2012. In fact, the Guggenheim Solar ETF (NYSE:TAN) has shed 14.6% since the turn of 2012. The situation becomes increasingly grim when you take into account the ETF’s reversal from its 2012 high near $38.60 in February — TAN is down more than 39% in the past three months.

A string of abysmal quarterly earnings reports and disappointing guidance from major players in the sector has done little to boost confidence in solar stocks. The situation was capped off by yet another fundamental faceplant by solar systems giant First Solar (NASDAQ:FSLR), as the company swung to a first-quarter net loss of $449.4 million, or $5.20 per share, and an adjusted loss of 8 cents versus consensus expectations for a 59-cent profit.

Solar firms have their work cut out for them this week, as a weak market environment and low earnings expectations could create considerable headwinds. Among those companies slated to join the earnings fray are MEMC Electronic Materials (NYSE:WFR), ReneSola Limited (NYSE:SOL) and Canadian Solar (NASDAQ:CSIQ).

MEMC Electronic Materials

Silicon wafer specialist MEMC Electronic Materials is expected to post a first-quarter loss of 15 cents per share after the close of trading this afternoon. While there have been no revisions to the consensus estimate during the past 30 days, the whisper number of an 18-cent loss indicates that Wall Street might have its sights set significantly lower.

Historically, MEMC has been erratic in the earnings confessional, topping the consensus twice and missing expectations twice. The result is an average upside surprise of 63.75%, though MEMC has bested by as much as 314% (in the second quarter of 2011), and missed by as much as 70% (in the third quarter of 2011).

Sentiment is quite negative for WFR. The brokerage community has issued 15 hold or worse ratings, compared to just eight buys. Meanwhile, a hefty 12% of the stock’s float, or 26.3 million shares, are currently sold short. This negativity is somewhat impressive given that WFR already trades in the low single digits.

Options activity should be taken with a grain of salt when gauging it for expectations, as puts stand to realize very little in the way of profit given the limited downside of a $3 stock. That said, WFR’s front-month put/call open interest ratio arrives at a considerably bullish 0.13, with calls more than seven times as popular as puts in the May series.

Currently, WFR is trading near a fresh multi-year low, closing Tuesday at $3.31. As a result, the stock’s 14-day RSI is verging on oversold territory. The stock also is staring up at potential resistance from its 50-day moving average near $3.68.

While it might seem counterintuitive, WFR’s oversold status and lowered earnings expectations could work in the bulls’ favor by increasing the chances of a positive reaction to better-than-expected earnings. Along those lines, traders might want to consider a May 3 call, which was offered at 41 cents, or $41 per contract, at the close of trading Tuesday.

Alternately, selling a May 3 put also could allow an options trader to realize a profit by taking advantage of technical support. This latter strategy is for those traders not expecting WFR to rally significantly post-earnings. The May 3 put was last bid at 9 cents, or $9 per contract, at the close of trading Tuesday.

Canadian Solar

Turing our attention to Thursday morning, Canadian Solar is seen posting a first-quarter loss of 52 cents per share, down sharply from earnings of 44 cents per share a year ago. During the prior four reporting periods, Canadian Solar has topped expectations once and missed Wall Street’s targets three times. The result is a weighty average downside surprise of more than 102%.

As you might suspect, the analyst community is downright bearish on CSIQ’s prospects. In fact, the stock has not attracted a single buy rating, compared to eight holds, and one sell. Additionally, the consensus 12-month price target of $3.30 represents a premium of only about 3% to Tuesday’s close at $3.20, meaning there is room for potential price-target increase should Canadian Solar impress the analyst community.

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