Solar Stock with Rather Dim Prospects

04/12/2012 9:45 am EST

Focus: STOCKS

Donald Pendergast

Founder, Linear Trading Systems LLC

Shares of First Solar (FSLR) are down 95% from the all-time highs, but Don Pendergast of The LTS Letter explains why not even value investors should be quick to take a position in this one-time high flyer.

For those traders who remember the dot-com era in the mid- to late 1990s, the terms "mania stock" and "speculative bubble" are no doubt already familiar terms. Relatively few of those Clinton-era high-fliers in the stock market survived, much less thrived, after the devastating blowoff in the Nasdaq that started in the spring of 2000.

Newer traders should also recall when the homebuilder stocks were going vertical in the mid-2000s, uranium mining stocks in 2007 or so, and, last but not least, solar/alternative energy stocks in the late 2000s. The stock we’re about to do an autopsy on hails from the alternative energy industry group, one that peaked (in stock market terms) more than two years ago and has been in a bear funk ever since.

First Solar, Inc. (FSLR) traded as high as $317 in May 2008 and has faded steadily since those days of such hope and optimism amid the Presidential election year of 2008. The last 13 months have been especially brutal on the stock, with FSLR plunging from $175.45 in February 2011 to its current valuation of only $20.93 (as of April 6, 2012).

Clearly, this is more than just a normal pullback or a "buy the dips" situation, so what exactly is going on with this stock, anyway?

The daily chart of FSLR below really says it all; this stock is enmeshed in a steadily declining trend, one that features precious few rebound rallies for previously burned investors to recoup losses.

chart
Click to Enlarge

Medium-term money flow (based on the 34-period Chaikin money flow [CMF][34]) is horrible (and still dropping), with no sign yet of a meaningful price/money flow divergence on the chart. Even value investors need to be aware of certain technicals before blindly running to build a position in a beaten-down stock. In this case, waiting for a bullish price/money flow divergence would be a very wise strategy, as would waiting for at least one of the near-term resistance lines to be exceeded.

There are also few, if any, strong support levels below the $20 area, and with the stock’s long-term trend so bearish, it’s doubtful that anyone other than the most hardcore value investors would even consider the thought of starting to build a position in FSLR now.

The stock has neutral earnings growth potential, so the situation isn’t without hope, but a few things need to happen before FSLR might be worthy of a new position:

  1. The broad markets, which have likely peaked and are about to correct by 5% to 10%, need to form a major multi-cycle low, probably by late-summer 2012
  2. FSLR also needs to make a similar multi-cycle low in the same general time window (summer 2012)
  3. FSLR needs to close above the March 2012 high of $29.63 and then go on to close the open gap (the gap of late-February 2012) that exists between $34.13 and $34.50

Relatively high crude oil prices of late have also done nothing to help FSLR make a turnaround. In fact, it’s interesting to note that FSLR made its all-time high of $317 a full six weeks before crude oil made its own record-high close in early-July 2008. While both fell hard after that major blowoff in the commodities market, crude oil eventually recovered more than half its losses while FSLR just kept heading south.

As far as playing FSLR goes, the most prudent course of action might be to just stand aside until the broad markets bottom out sometime this summer before even considering taking a nibble on FSLR again.

Aggressive, skilled traders can be buying puts now in anticipation of more downside into a major summer low in the broad market, but don’t go overboard, because it’s always possible for FSLR to stage a short-covering rally every so often, one that could be very expensive if you manage to get caught on the wrong side of it.

By Don Pendergast of The LTS Letter

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