Is It Time To Short This Soaring Solar Stock?

One of the things I learned early in my trading career was that in that business, admitting and acknowledging mistakes is a good thing. That is so ingrained in me now that I have continued to do that as a writer on markets and trading, even though in that field of work one is expected to do the opposite. Apparently, we are all supposed to pretend that every call we ever made was spot on, but that is neither realistic nor helpful. So, I have no problem saying that last time I wrote about First Solar (FSLR) things didn’t go my way, to say the least!

In mid-August last year, I wrote that having made good money on the way up by being long FSLR, I was taking my profit and reversing to a short position. Obviously, that wasn’t a great call, although if you read that piece, you may remember that part of the appeal for me of taking on a risky trade like that was the proximity of a logical level off which to set a stop loss order. I did that, lost a small percentage of what I made on the way up, and moved on.

There are a couple of lessons here for anybody new to the trading game. First, set and stick to stops. You will be wrong sometimes, and no one trade should ever do serious damage to your account. Second, don’t waste time once a decision is made and you have cut a position by saying to yourself, “I could have made so much more!” You are never wrong to take a profit, so just cut and look elsewhere. That said, though, I continued to follow FSLR as it has been one of the best trading stocks for me for years. In the past, it has fallen in and out of favor in a fairly predictable cyclical fashion, but the most recent move up broke that pattern, taking it to levels not seen since 2009.

However, if you go back that far, the level where the stock is now, just above $200, was significant. It was where a strong rally after a big drop petered out, and before too long the stock had dropped to a low of $11.43.

Now, I am not expecting quite such a dramatic reversal here, but there are reasons that I want to use this level as a trigger for another try at shorting FSLR.

The last time First Solar was trading in the $200s, the company was making some serious money, consistently reporting quarterly EPS of well over $1, and over $2 on a couple of occasions. Compare that to now, when the company has posted a trailing 12-month loss of around 44 cents per share, and you cannot help but think that maybe FSLR is a bit overpriced. Believe me, I know as well as anyone that this is a stock that has traditionally traded on prospects rather than performance, but profitability still matters.

And it is not as if those prospects are without risks. The stock has benefitted enormously from the fact that the company has no supply chain exposure to China, but paying more to source materials and manufacture elsewhere is not without the potential for problems. Even if the Fed avoids a drastic recession here in the US as they raise rates and squeeze liquidity, the recent banking crisis has shown that there will be consequences to that policy change. There will be a slowing of the economy, it is just a matter of to what extent, and people tend to be less “green” when times are tough. It won’t take much for that to register on a stock that is trading at a significantly higher-than-average multiple of projected earnings, as FSLR currently is.

Add in the big drops in oil and natural gas that are making traditional energy sources more competitive again, and even though I have been bitten once, I am not shy of taking another short position in FSLR. Obviously, given my last experience, I will be somewhat cautious and will set a stop not too far away, around $230, and I will stick to that no matter what. With that risk mitigation in place, though, a bearish options position on what looks like an overvalued stock seems like a decent play, no matter what happened last time!