Solar power concern First Solar (FSLR) will step into the earnings limelight after the close of trading Tuesday afternoon. Wall Street has grown more bullish on the company heading into the report, but there is still a sizable “wall of worry” for FSLR stock to climb.
With shares beginning to show signs of a potential rebound, tomorrow’s quarterly report could provide opportunities for savvy options traders.
Diving into the numbers, Wall Street is looking for considerable year-over-year gains for First Solar earnings. Specifically, the consensus is looking for a second-quarter profit of 36 cents per share from First Solar, up significantly from year-ago earnings of just 4 cents per share. Revenue, meanwhile, is seen rising roughly 38% to $751.72 million.
Still, there are some reservations among analysts. For instance, EarningsWhisper.com reports that First Solar’s second-quarter whisper number arrives 4 cents below the consensus at 32 cents per share — still a considerable increase over year-ago levels, but well off Wall Street’s benchmark. There is some precedent for the lower whisper number, however. Historically, First Solar has missed expectations in three of the past four reporting periods.
While the brokerage bunch has talked a good game in the financial media of late, it would appear that even they are playing it close to the vest heading into First Solar’s report. According to data from Thomson/First Call, nine of the 15 analysts following FSLR still rate the shares a “hold” or worse. With the 12-month price-target of $65 representing a lofty premium of 46.7% to Friday’s close, there is a chance that analysts will upgrade their ratings to match targets if First Solar earnings live up to current expectations.
Bearish sentiment is also prevalent among short sellers. As of the most recent reporting period, 7.1 million shares of FSLR stock were sold short, comprising a sizable 9.6% of the stock’s total float. From a contrarian standpoint, this short position could provide ample fuel for a short-squeeze if earnings kick off a rally.
If short sellers are nervous about a bullish post-earnings reaction from FSRL stock, options data certainly isn’t showing any signs. Typically, short sellers will purchase calls ahead of an unknown event in order to hedge their positions. Currently, the August put/call open interest ratio arrives at 1.05, with put open interest outnumbering call open interest among near-term options. Furthermore, this ratio rises sharply to 1.10 in the weekly Aug 8 series.
Click to Enlarge Overall, weekly Aug 8 series implieds are pricing in a potential post-earnings move of about 7% for FSLR stock. This places the upper bound at $47.60, while the lower bound lies at $41.40. A rally would push FSLR into resistance at its 50-day moving average, while a decline would leave the shares well north of support at the round-number $40 level.
2 Trades for FSLR Stock
Call Spread: With opinions growing bullish on FSLR heading into tomorrow’s report, and plenty of lingering bearish sentiment to unwind, a contrarian play has a great deal of profit potential. Those traders looking to bet against the grain might want to consider an Aug $44.50/$46.50 bull call spread.
At last check, this spread was offered at 79 cents, or $79 per pair of contracts. Breakeven lies at $45.29, while a maximum profit of $1.21, or $121 per pair of contracts, is possible if FSLR stock closes at or above $46.50 when August options expire.
Put Sell: If you’re not sure about FSLR’s potential upside, or feel that the stock may stagnate following tomorrow’s report, then a weekly Aug 8 series $40 put sell may be what you are looking for. At last check, the weekly $40 put was listed with an attractive bid of $1.07, or $107 per contract — your results will likely vary, especially with FSLR stock down in early Monday trading.
The upside to this put sell strategy is that you keep the premium as long as FSLR stock closes above $40 when August options expire at the end of this week. The downside is that should FSLR trade below $40 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $40 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
