Betting Against First Solar Bears Ahead of Earnings

by Joseph Hargett | May 3, 2012 10:36 am

Betting Against First Solar Bears Ahead of Earnings

Solar power specialist First Solar (NASDAQ:FSLR[1]) is facing a veritable flood of negativity ahead of tonight’s first-quarter earnings release. The company is expected to post a profit of 59 cents per share on revenue of $688 million, down sharply from EPSĀ  of $1.33 on revenue of $567 million a year ago. However, the whisper number, according to EarningsWhisper.com, arrives considerably lower — at just 29 cents per share.

First Solar has been plagued by falling prices and a global glut of solar panels, forcing it to close its German factory, cut production at its Malaysia facilities and trim nearly a third of its work force. Furthermore, First Solar cut its 2012 outlook in February, but analysts are expecting the firm to once again lower its outlook alongside its first-quarter earnings report after Thursday’s market closes.

Taking a look at some key sentiment metrics for First Solar, we find that the brokerage community has issued just eight buy ratings, compared to 27 holds and four sells. Additionally, there’s a huge short position on FSLR — the roughly 23 million shorted FSRL shares account for a whopping 38.6% of the stock’s total float.

If short sellers are nervous about a bullish post-earnings reaction from FSRL shares, options data certainly isn’t showing any signs. Typically, short sellers will purchase calls ahead of an unknown event in order to hedge their positions. Currently, FSLR’s front-month put/call open interest ratio arrives at 1.22, with put open interest easily outnumbering call open interest in the May series.

The weekly May 5 option series is also light in terms of call open interest, sporting a put/call open interest ratio of 0.88. Taking a closer look at the weekly May 5 options data reveals that the market is pricing in a post-earnings move of about 10.7%.

From a technical perspective, FSLR deserves a considerable degree of the negativity being levied against it. Over the past year, the stock is down more than 85%, with a year-to-date decline of about 45%. The shares have struggled with resistance at their 10-day and 20-day trendlines since early February, tagging an all-time low of $17.65 yesterday.

That said, the shares appear to be forming a bottom, with the stock bouncing around the $18 area for the past several trading sessions. Furthermore, FSLR’s 14-day relative strength indicator (RSI) is hovering near oversold territory, indicating that buyers may be set to return.

Given the heavy-handed bearish sentiment and the stock’s current trading range near an all-time low, it would appear that investors have already factored in another poor earnings report from FSLR. So, there appears to be little hope of a post-earnings plunge — unless First Solar has some hidden losses or is considerably worse off than it has let on.

It would stand to reason then that the shares could be poised for a potential post-earnings rally, especially if the company has even a sliver of positive news to report. In this situation, FSLR also stands to benefit from a potential short-squeeze situation, as short sellers scramble to take profits amid a potential post-earnings rally.

Options traders willing to buck the trend and take a chance on such a rally could make a handsome profit by entering a weekly May 5 18/20 bull call spread. This trade was last offered at 70 cents, or $70 per pair of contracts. Breakeven lies at $18.70, a gain of about 2.7% from Wednesday’s close, while a maximum profit of $1.30, or $130 per pair of contracts, is achieved if FLSR finishes this week at or above $20.

Endnotes:
  1. FSLR: http://studio-5.financialcontent.com/investplace/quote?Symbol=FSLR

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