With one market bull running on gas fumes, another one could just now be taking off in select solar plays First Solar, Inc. (NASDAQ:FSLR), SunPower Corporation (NASDAQ:SPWR) and SolarEdge Technologies Inc (NASDAQ:SEDG). Let’s take a look at FSLR, SPWR and SEDG off and on the price chart and use the options market to better navigate an emerging bullish trend for these solar stocks.
It’s been just over a month since I wrote about solar plays FSLR, SPWR and JinkoSolar Holding Co., Ltd (NYSE:JKS) in a favorable light. In the interim, one stock has been on fire, a second has added nice gains for shareholders and the third has simmered.
Overall, the net stock performance hasn’t been too shabby. But for options traders, it’s really been all about FSLR’s discussed June $32.50 call. The contract has put together a scorching 438% return in going from 80 cents to $4.30. Yeah, I don’t mind saying that sizzles!
And guess what? I believe a more favorable trend is just starting for FSLR, SPWR and now, a fresh up-and-comer in SEDG stock. That’s right! Bears need to go find a new home or risk serious third-degree burns as solar continues, in our view, to fly in the face of conventional wisdom.
So if traders are okay with ignoring a narrative laughably tied to oil and the Trump administration, let’s talk charts.
Solar Stocks to Buy: First Solar (FSLR)
Click to Enlarge First Solar remains the undisputed king of solar. Most recently, I wrote a bullish standalone piece on FSLR after the company knocked the socks off Wall Street’s estimates and issued a very sunny forecast.
Of the three solar picks, FSLR is hands down the best long-term bet on solar. Looking to the FSLR stock chart, First Solar’s breakout of four downtrend lines and reversal back thru a prior bear flag are strong signs of a trend change.
So far, a higher high and higher low are still absent from the weekly chart, however. But it’s only a matter of time before that happens. I’m undecided as to which will occur first, but I see support in the $32.50-$35 area backed by FSLR’s earnings reaction gap and the flag pattern.
On the upside, and should FSLR continue to rally, $38.50-$43.50 is a wide, but important zone that’s like to find some backing and filling. The price range holds the last pivot high and an extended resistance line, which marked the solar stock’s breakdown below the 2015-2016 lows.
Taking in our technical observations, I like approaching the stock with a modified fence. With shares at $36.38, the July $40/$42.50 bull call spread combined with selling the July $32.50/$30 bull put spread is priced for a credit of 25 cents.
What’s that get the trader? From $32.50 to $40 at expiration the credit is captured. The trader has a vertical worth up to $2.75 above $42.50 after factoring in the credit. On the downside? The combo maintains a breakeven of $32.25 and maximum risk of $2.25, but also the opportunity to buy FSLR stock at a discount with stronger control features than a simple purchase of shares.
Solar Stocks to Buy: SunPower (SPWR)
Click to Enlarge Next up on our list of solar stocks is SunPower. SunPower is the solar industry’s other dominant player, but the company has definitely struggled despite energy giant Total SA (ADR) (NYSE:TOT) having a controlling interest in outfit. There is hope, though.
Most recently, SunPower topped Street views with its latest corporate confessional. The bad news, the 36% earnings beat was still in the red with losses of 42 cents per share of SPWR. The per-share figure also matched the prior year’s red ink; and on a GAAP basis, it showed even harsher wear and tear. The good news for this solar play? Revenues managed to top forecasts, and notably, management reiterated its full-year sales guidance. SunPower also anticipates it can deliver positive operating cash flow and Ebitda for FY 2017 and finish with a cash position of $300 million.
Optimistically, the recent low in SPWR does set up a variation on a double-bottom pattern of around five months in duration. The post-earnings reaction was also constructive as an early loss was reversed to form an engulfing bullish candlestick which just breached a two-month high.
Reviewing the options market, one backstop I like in SPWR stock is the Sept $8/$9 bull call spread. With shares at $7.14 the vertical is priced for 25 cents. This spread risks less capital up front than most strategies in the event SPWR’s heavy short interest of 34% is respectfully on the right side of the action.
The compromise with this out-of-the-money vertical is the approach demands SPWR to prove itself on the stock chart. Considering what we know today, however, this seems more sensible than waiting for Total SA to save the day.
Solar Stock #3: SolarEdge (SEDG)
Click to Enlarge SolarEdge could be the strongest contrarian play on solar at this point in time. Sure, it isn’t nearly as well-known or established as First Solar or SunPower, but it’s consistently beat the Street and made money in a tough operating environment.
That said, SolarEdge has its share of naysayers. For one, Goldman Sachs holds a “sell” rating on SEDG shares and short interest is a bearish 27%. Others like JMP Securities, however, are optimistic SEDG will continue to outperform. The broker lifted its price target on shares from an above-market $19 to $22 following the latest earnings report.
On the price chart, SEDG leaves little doubt the trend has already turned a good deal friendlier for bulls in 2017. Shares are now bursting higher through an established uptrend pattern following last week’s reaction to earnings and setting up SEDG as a potential momentum play. With shares at $17.65, the June $18/$20/$22 call butterfly is attractively priced for 40 cents or better.
Ultimately, the trader is at risk of forfeiting the spread’s debit below $18 or above $22 at expiration. But considering a profit range between $18.40 and $21.60, and a max return of $1.60 at $20, SEDG stock looks ripe for bullish traders using this targeted butterfly.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.