Shares of JinkoSolar (NYSE:JKS) have certainly been on a wild ride recently. Jinko Solar stock rocketed higher by over 350% from its Sept. 18 low of $24.50 to its Oct. 20 high of $87.55. Since then, traders have punished the stock.
Jinko Solar is now back at $58.30 following a 35% drop. The red-hot rally had gotten out of hand. In a similar fashion, the recent selling has reached an extreme as well. That means it’s time to be a buyer of JKS on any further weakness.
Solar stocks have been one of the strongest sectors lately. The move by both China and the U.S. into a bigger renewable energy stance has been the catalyst behind the recent rally. Look for that to continue as green energy continues to make a bigger footprint. This will serve to provide solid support over the long term for Jinko Solar stock.
JKS is definitely not expensive, especially after the most recent dip. Its current price-to-earnings ratio is now under 20 at 14.5x. Its forward P/E stands at just 16.4. Both of these are very cheap given the growth potential for solar stocks and Jinko in particular.
They are also at a steep discount to the S&P 500 price-to-earnings multiples of 33x (current) and 24x (forward). InvestorPlace.com contributor Larry Ramer had some additional insights in his recent analysis of Jinko Solar stock that dive deeper into its valuation.
The stock is getting decidedly oversold from a technical perspective. The MACD is at the lowest levels of the past three months by far. Momentum has fallen from an overbought extreme to oversold extreme in just a few weeks. The 5-day RSI is nearing an area that corresponded with a significant low in the past. Jinko Solar is also trading at a discount to the 20-day moving average for the first time since the early September lows.
The Jinko Solar Stock Chart
More importantly, Jinko Solar stock had a strong reversal off the lows on Friday. Shares traded all the way down to $56.22 before rallying sharply. Jinko Solar ultimately closed at $58.30, more than $2 off the lows. This type of price action, especially following such as a vicious drop, is often indicative of a short-term low. The sellers have finally become exhausted and the buyers have taken control.
I had a more bearish view on JKS in my previous analysis of the stock on Oct. 9. But things have changed since then. My recommendation was a bearish call spread at that time. Now that Jinko Solar has fallen over 30 points from the Oct. 21 intra-day highs, my opinion has changed to a more neutral stance-because price does matter.
I prefer using defined risk option strategies in this type of high implied volatility (IV) environment. So to position to be a buyer of Jinko Solar stock at lower levels, an out-of-the-money bullish put credit spread makes sense.
The high levels of IV favor option selling strategies when constructing trades. Higher IV also means we can get a bigger cushion for selling spreads. This provides a bigger margin of safety. Safe is never a bad thing.
How to Trade JKS Now
Sell JKS Nov $50 puts and buy JKS Nov $45 puts for a $1.00 net credit.
The maximum gain on the trade is $100 per spread. The maximum risk is $400 per spread. Return on risk is 25%. The short $50 strike price provides a 14.2% downside cushion to the $58.30 closing price of Jinko Solar stock.
Earnings aren’t due until December, so the spread will expire prior to the earnings release. It is also a natural hedge to the bear call spread I recommended back in early October.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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