My passion is finding those stocks that are on the verge of breaking out. But to do this, it’s important to focus on more than just the technical indicators on a chart. You also have to pay attention to the fundamentals.
That’s why I’m getting in touch today. SolarCity Corp (SCTY) is one stock that has been making moves in the market recently. SCTY is having a serious go at its 50-day moving average, and while many would guess this is a signal that a breakout is around the corner, I think it’s worth taking an even closer look under the surface.
While the action of a chart may tell you one thing, the company’s underlying fundamentals may tell a completely different story.
SolarCity is the largest solar provider in the United States. It creates affordable clean energy made available to all sorts of consumers, including residential homes, businesses, schools and more.
Since just before the second quarter, SCTY stock has been making a run at its 50-day moving average — something it hasn’t done since mid-January. It has closed above that level every day this week so far. SolarCity also is attempting to break through another important resistance level at $28.29, which was the high it set in March during a rally that failed to break through the 50-day line.
The current attempt at the 50-day is impressive, but one thing that concerns me (aside from the resistance I just mentioned) is the lack of heavy volume. Volume has been below the three-month average over the last week, which suggests that there are not a lot of buyers pushing the stock higher. Instead, it was actually just a lack of sellers at the lower prices.
That said, there is one catalyst that could spur more volume if SCTY is able to break through its resistance level: the short sellers. As of the most recent data, 41.4% of the float on SolarCity is short, so a sustained rally and breakout would force the shorts to cover their positions, in turn causing a short squeeze.
SolarCity’s Business Has Potholes, Too
News has been mixed for this company recently. On the positive side of things, SCTY announced on March 31 that it had “closed a renewable energy certificate transaction that would provide up to $40 million worth of solar funding for residential and commercial properties.” But on the negative end, one of the biggest names in the solar industry, First Solar, Inc. (FSLR), came out this week and postponed its fiscal 2017 outlook.
It’s never a good sign when an industry leader telegraphs something negative about future figures, and in fact it’s often a sign that the entire sector is struggling.
That leads me to my fundamental analysis of SolarCity.
Yes, the chart could be setting itself up for a breakout and short squeeze, but management still needs to figure some things out. The company is looking to increase revenue by approximately 50% over the next two years, but it’s still losing hordes of money. SCTY is expected to lose $9.13 a share in 2016 and another $8.60 share in 2017, and even with revenue growing at such a large clip, it’s simply not possible for a company to survive when it’s hemorrhaging money at this pace.
There’s no doubt that this sector is facing an uphill battle as it relies on subsidies from the government that could be taken away at any time. So while I like SolarCity as a potential short-term trade (assuming it is able to muster up enough energy to close above resistance), the uncertainties of the overall sector, the amount of money that SCTY is losing and the long-term bearish nature of the chart tell me that the risks may simply be too much to overlook here.
Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks, the ETF Bulletin and Co-Editor of Breakout Stocks.
