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3 Solar Trades Searching for a Silver Lining

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.

Options data is par for the course when dealing with a $3 stock. For instance, the CSIQ’s front-month put/call open interest ratio of 0.37 indicates that calls nearly triple puts in the May series of options. Peak call open interest totals 1,473 contracts at the out-of-the-money May 4 strike, while another 529 contracts reside at the May 3 call. Peak put open interest numbers a mere 382 contracts at the May 3 strike.

On Tuesday, CSIQ slipped further beneath former support at its 50-day moving average. The shares have ping-ponged around this long-term trendline since the middle of April, even as longer-term resistance in the form of CSIQ’s 200-day moving average descends in the $4 region overhead. Overall, CSIQ has posted descent gains for 2012, adding 20.75% this year. Additionally, the stock continues to trend sideways along key support at the $3 level.

Bullish CSIQ options traders might want to consider buying the in-the-money May 3 call, which was last offered at 40 cents, or $40 per contract, on Tuesday. Breakeven lies at $3.40, representing a gain of about 6.3% from yesterday’s close.

ReneSola Limited

Analysts also are expecting heavy losses for China-based solar wafer producer ReneSola (NYSE:SOL) when it reports Friday morning, with the consensus expecting a loss of 30 cents per share, down from a profit of 64 cents per share in the year-ago period. While MEMC’s earnings history is shaky, ReneSola’s is downright abysmal, with the company missing Wall Street’s expectations in each of the prior four reporting periods, resulting in an average downside surprise of more than 44%.

Naturally, expectations are low for ReneSola, with brokerage firms handing out nine hold or worse ratings and no buys, while 11% of the stock’s float is sold short. SOL’s options backdrop is similar to WFR’s in that options traders heavily favor calls in the May series. Currently, the front-month put/call open interest ratio arrives at 0.42, with calls more than doubling puts. As noted above, however, high put/call open interest ratios are common place for low single-digit stocks.

Technically, while SOL is down sharply from its 2012 peak near $3.40, the stock actually sports a gain of roughly 13.5% on the year. The stock currently is trading just below long-term support at $2 after the recent market turmoil forced the shares below this support level in early April.

Options traders looking to play SOL ahead of earnings might want to focus on the $1 level. At the close of trading on Tuesday, the May 1 call was asked at 85 cents, or $85 per contract. Breakeven for this trade lies at $1.85, a gain of 4.5% from yesterday’s close. Furthermore, this in-the-money call should help limit losses on any post-earnings decline for SOL.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities, nor does he have plans to enter such a position in the next 72 hours.

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