I’ve been called a stock nerd before, and that’s a moniker I wear with pride. However, I’ve also been called a science nerd, and while studying physics at UCLA, I nearly went the astronomy route (although admittedly I couldn’t handle the über-difficult math). So, whenever I get a chance to write about stocks in a science-related sector, I jump on the chance.
Such is the case today with stocks in the solar space, which have recently seen a big dive, followed by a huge spike higher. In fact, the technical picture of some of the companies in the sector reminds me of what astronomers at NASA recently caught on film — a giant solar flare that exploded on Oct. 14.
In early November, we saw a technical implosion in several stocks in the sector, including the exchange-traded funds that represent a basket of the biggest players in the solar game. That implosion was followed by a big spike higher for many solar stocks midway through the month.
So, why the recent flux, and what should investors make of these latest solar flares?
Let’s take a closer look at a few charts to see just what the action looks like, as that will give us a better picture of how much upside there is in what certainly looks like a tradable bounce. And because technicals only tell part of the tale, let’s take a look at the fundamental drivers influencing the sector.
On Wednesday, two sector stalwarts — JA Solar (NASDAQ:JASO) and Yingli Green Energy (NYSE:YGE) — reported third-quarter losses. And though both still are deeply in the red, the losses were better than Wall Street analysts were anticipating. That sent both JASO and YGE shares up big, and in just the past five trading sessions JASO has vaulted nearly 18% while YGE has spiked an incredible 36%.
Gains like these due to an earnings beat can certainly be described as solar flare-esque, but it wasn’t simply the lower-than-expected losses that sent the stocks higher. The real catalyst for the flare-up in the shares — along with most of the stocks in the sector — was that both companies said they expected to see a rise in demand for their products from China.
JA Solar said shipments within its own country more than doubled sequentially, fueled by strong orders from utility companies. Yingli said it saw an increase in Chinese sales in Q3, and that it expects strong China sales in Q4. The company also plans to expand into the growing Southeast Asian solar market next year.
The two charts here of JASO and YGE show the rebound in the both stocks off of their recent 52-week lows:
In the case of JASO, shares are fighting their way back to the 50-day moving average (blue line). For YGE, the shares already have breached the 50-day. If the buying momentum for both of these stocks can continue on the prospects of stronger China sales, then both could see a move back above their respective 200-day moving averages (red line).
For traders looking to buy the bounce here, getting in now and riding JASO shares up to the 200-day MA would give you another 55.5% upside. In YGE, buying now and holding the shares to the current 200-day MA would provide you with a gain of nearly 53%.
This kind of upside potential is similar for other beaten-down stocks in the space, including First Solar (NASDAQ:FSLR), MEMC Electronic Materials (NYSE:WFR), SunPower (NASDAQ:SPWR) and Trina Solar (NYSE:TSL).
In terms of the ETF play for investors who don’t want to take company-specific risk, the Guggenheim Solar ETF (NYSE:TAN) has a very similar chart pattern to JASO and YGE.
Entering into this fund at current levels — and tapping into a trend that could send the shares back above the 200-day average — would net you a gain of more than 36%.
In my book, that’s a solar profit flare that investors simply cannot ignore.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.