Buy the rumor, sell the fact, buy the confusion. That seems to be the motto when it comes to trading First Solar, Inc. (NASDAQ:FSLR) stock.
A few months ago, solar equipment manufacturers Suniva and SolarWorld filed a complaint with the International Trade Commission (ITC) that cheap Chinese solar imports were a major competitive risk to U.S. companies. The complaint acted as a major catalyst for FSLR stock, which was widely seen as a beneficiary of potential tariffs for multiple reasons, namely its low cost advantage.
Buy the rumor.
FSLR stock proceeded to nearly double into the ITC ruling on Friday, Sept. 22. As was widely expected, the ITC ruled U.S. producers are indeed harmed by cheap imports. President Trump is expected to announce tariffs against solar imports by Nov. 13.
Sell the fact.
FSLR stock has dropped sharply since then. Although the stock recorded a 52-week high of $53 last Friday, the trend has been down ever since then. Today, FSLR languishes around $46. Investors are starting to question the original bull thesis, and in so doing are getting really confused. What happens now? Will these tariffs actually benefit FSLR? Will there even be tariffs?
Buy the confusion.
This confusion is creating a unique buying opportunity into a secular growth name that will be a huge long-term winner as a result of tariffs from the Suniva/SolarWorld case.
FSLR Will Likely Gain A Lot of Market Share Next Year
The big catalyst is that the potential tariffs won’t actually affect FSLR while really hurting the rest of the industry.
Most solar companies, like SunPower Corporation (NASDAQ:SPWR), use silicon-based panels. That is why the target of the ITC case is crystalline silicon.
But FSLR uses a different technology all together. As opposed to crystalline silicon, FSLR uses something called cadmium telluride. Cadmium telluride isn’t included in the trade ruling.
So what does that mean? Tariffs will likely be imposed on crystalline silicon, but not on cadmium telluride. Consequently, FSLR will likely be able to avoid the negative consequences of solar tariffs. While other solar companies struggle with the tariffs, experience margin erosion, and move plants to the U.S., FSLR will have a huge runway to profitably grow market share.
Those market share gains could be quite huge.
Panels are a big cost-driver for solar companies. According to Bloomberg, panels account for about 40% of the cost of solar farms. That means that even small price hikes in the per watt price of solar cells could lead to huge expense increases for solar companies that make silicon-based panels.
But not for FSLR. While the rest of the industry is staring at potentially huge increases in their cost base, FSLR is starting at a potentially huge opportunity to grab a ton of market share in a rapidly growing industry.
Much like the electric car revolution, the solar energy revolution is starting to come into its own and has many years of big growth ahead of it. The US solar market had a record breaking year in 2016. It more than doubled year-over-year and added more electric-generating capacity than any other source of energy. Thats a first.
Over the next 5 years, this market is expected to triple in size. Globally, the market is expected to grow at a 24% compounded annual growth rate into 2022. That seems reasonable. That growth is coming on top of a relatively small base. Plus, big and innovative companies like Tesla Inc (NASDAQ:TSLA) are starting to legitimize the space.
Bottom Line on FSLR Stock
It has had quite the run up. And I hate chasing rallies.
But the recent pullback is pretty dramatic in nature and FSLR stock isn’t that expensive. It only trades at 0.9-times book value, which is about the average valuation this volatile stock has featured over the past 5 years. The stock traded as low as 0.5-times book value earlier this year, and as high as 1.5-times book value in 2014.
A middle-of-the-road valuation for a stock with a big potential growth catalyst on the horizon sounds like good risk-reward asymmetry to me.
I’m a buyer here.
As of this writing, Luke Lango was long FSLR stock.