Plunging oil costs have thrown a wet blanket across much of the energy sector, and while solar companies are obviously an alternative to fossil fuels, dirt-cheap oil is cutting significantly into the bottom line.
Investors will get a glimpse at the extent of the impact next week when solar sector leader First Solar, Inc. (NASDAQ:FSLR) steps into the sun to release its fourth-quarter earnings report after the close of trading on Tuesday.
Digging into the numbers, Wall Street is projecting a fourth-quarter profit of 77 cents per share from First Solar, a figure that is down from the 89 cents per share the company posted in the same quarter last year. Additionally, speculation is thin within the analyst community, as the whisper number arrives in line with the consensus.
That said, First Solar does have the potential for solid guidance, especially after signing an $848 million deal with Apple Inc. (NASDAQ:AAPL) to build a solar energy plant in California to help the company lower its carbon footprint. So far, FSLR shares have rallied nearly 20% in the past month following news of the Apple tie-up.
The overall sentiment outlook for FSLR is considerably bearish. For instance, data from Thomson/First Call reveals that 11 of the 17 analysts following the stock rate it a “hold” or worse, compared to just six “buy” ratings. Additionally, FSLR’s average 12-month price target of $56 represents a meager premium of about 16% to the stock’s close at $48.41 yesterday.
Outside the brokerage community, short sellers decreased their positions by nearly 7% during the most recent reporting period, but there is still a sizeable amount of short interest open on FSLR. In fact, short interest still accounts for a hefty 11% of the stock’s total float (or shares available for public trading). That said, while a short-squeeze situation is possible, the First Solar would need to give these bears a pretty good reason to close out their positions.
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, the March/April put/call open interest ratio arrives at 1.14, with put open interest easily outnumbering call open interest in the front two months of options.
Turning to the options pits, if FLSR short sellers are worried, they aren’t buying many calls to cover those positions. Specifically, the February/March put/call open interest ratio for FSLR options arrives at a middling reading of 0.72. This ratio rises to 0.99 in the weekly Feb. 27 series, with calls and puts in near parity.
Overall, weekly Feb. 27 series implieds are pricing in a potential post-earnings move of about 9.4% for FSLR stock. This places the upper bound at $53.07, while the lower bound lies at $43.93. A rally would push FSLR north of long-term resistance at $50, while a decline could put the shares at risk of breaching support at their 200-day moving average.
2 Trades for FSLR Stock
Call Spread: The contrarian in me wants to bet on FSLR’s current uptrend and positive guidance stemming from the Apple deal, which could create a reversal in sentiment for the stock. As such, those traders looking to bet against the grain might want to consider a Mar $47.50/$52.50 bull call spread.
At last check, this spread was offered at $2.18, or $218 per pair of contracts. Breakeven lies at $49.68, while a maximum profit of $2.82, or $282 per pair of contracts, is possible if FLSR closes at or above $52.50 when March options expire.
Put Spread: The pessimist in me, however, is concerned that First Solar is going to have a tough time providing positive guidance in the current market environment, regardless of Apple’s help. As such, traders looking to throw in with the bearish bandwagon might consider a Mar $45/$50 bear put spread.
At last check, this spread was offered at $2.37, or $237 per pair of contracts. Breakeven lies at $47.63, while a maximum profit of $2.63, or $263 per pair of contracts, is possible if FSLR stock closes at or below $45 when March options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
