Buffett News Helps Ailing First Solar

12/09/2011 9:00 am EST

Focus: OPTIONS

Recent M&A activity has given battered shares of First Solar (FSLR) a much-needed boost, but with the stock trading below strong resistance, the sudden spike in optimism may be overdone.

As solar manufacturing companies struggle amid global belt-tightening measures, rumors are swirling of possible mergers and acquisitions among renewable energy concerns as a means of survival.

First Solar, Inc. (FSLR) stepped up to the dealmaking plate this week when it announced that Warren Buffett’s Mid-American Energy Holdings Company will purchase FSLR’s Topaz Solar Farm, a 550-megawatt photovoltaic power plant. While the transaction occurred for an undisclosed amount, the projected cost to build is roughly $2 billion.

The San Luis Obispo, Calif.-based plant is one of the two largest solar energy farms being constructed in the world, and is projected to create enough power for approximately 160,000 homes in California.

As alluded to previously, FSLR has been hammered on the charts. In fact, shares of the stock have lost 64.5% of their value year-to-date. Plus, over the course of the past 60 trading sessions, FSLR has underperformed the broader S&P 500 Index (SPX) by over 52 percentage points on a relative-strength basis.

See related: Relative Strength at Its Simplest

Despite today’s Buffett-related bounce, FSLR has yet to break through the psychologically significant round-number $50 level, an area that provided stubborn resistance throughout November.

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Even though FSLR has been a technical laggard, recent sentiment has been decidedly bullish. For instance, the equity’s Schaeffer’s put/call open interest ratio (SOIR) of 0.87 ranks just three percentage points above a 52-week low, indicating that short-term speculators have rarely been more optimistically aligned toward the stock.

Echoing this bullish bias is the stock’s ten-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and Nasdaq OMX PHLX (PHLX) call/put volume ratio of 1.41. This ratio ranks higher than 87% of similar annual readings, showing that calls have been bought to open over puts at a faster-than-usual pace in the last two weeks.

Option activity in this week’s sessions has been heavy given the M&A news. Calls continue to be the options of choice, with roughly 21,000 contracts changing hands on Wednesday by mid-day. By contrast, around 18,000 puts had crossed the tape by mid-day.

Looking a bit deeper into the information, this recent uptick in call volume may be pointing to hedging activity. Short interest currently accounts for a hefty 36.7% of the stock’s available float. At FSLR’s average daily trading volume, it would take over six days to cover these shorted shares. However, as long as the stock remains stuck below $50, the bears may find little motivation to cash in their bets just yet.

By the Staff at Schaeffer’s Investment Research

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