Is It Time to Sell This Top Performing Energy Stock?

Whether you trade actively or are more of a long-term investor, there are some stocks that you just seem to get right a lot more than you get wrong. From both of those perspectives, one of the best for me over the years has been First Solar (FSLR). It is something on which I have made a lot of money and, in a piece that I wrote in October of last year in which I recommended buying it at around $145, I identified why that is so. It is because for some reason, FSLR usually does what the chart suggests it will, or at least what the obvious indicators I look for suggest it will.

That was, in fact, the last time I wrote about FSLR, and I still have the long position that I accumulated during that dip…but I won't have it for long. The stock is at one of those obvious chart points, one that suggests that taking profit here would be a smart move. The clue is in the long-term chart below, and you don't have to be a genius chart reader to see what I mean…

On Thursday, as I write, FSLR is trading a little lower, but significantly that drop is coming after hitting its all-time high close. The actual intraday traded high back in 2008 was above $300, but the fact that the stock is turning, even slightly, after trading above $275 convinces me that now is a good time to unload.

As I said, that is based on the chart, which has been a good way for me to make decisions about this stock in the past, but it is also supported by an analysis of the fundamental factors that drive First Solar. One of the biggest of those is the relationship between the US and China, and I'm sure some of the gains over the last month or so are down to improvements in that regard. However, if the history of US/China relations shows one thing, it is that the situation at any given time will almost certainly change before too long, and simple logic says that will be the case this time too, for multiple reasons.

First and foremost, we are in an election year, and US politicians will be falling over themselves to come up with policies that are "tough" on China, one of the few countries that, even in this hyper-partisan environment, both sides see as an enemy, or at least a convenient threat with which to scare voters. That will probably lead to some proposals for tariffs and the like and China is not exactly known for letting things like that go unanswered, even if they are blatantly tactical political moves. A deterioration in relations as the election approaches looks almost inevitable at this point.

The other two factors driving FSLR higher have been a shift in policy in China away from deliberately overproducing solar panels to grab market share, even if that means lower prices and an expectation that AI will benefit the industry. The first of those I completely understand. Obviously higher prices benefit First Solar, but there are two qualifying things here.

First, just because the Chinese government is taking that stance right now, it doesn't mean that they will be doing so in a few months' time. Industrial policy in China is as much about geopolitics as it is about economics, and changes to the government's attitude toward individual industries are frequent. Then there is the fact that higher prices will dampen demand. Demand for anything is almost always price sensitive to some extent, but for solar power, which is almost always adopted as a replacement for existing sources of energy, demand is also subject to comparative pricing. So, while the policy shift looks beneficial now, it may not turn out to be advantageous at all.

As for the AI argument for buying FSLR, it leaves me a bit baffled, to be honest.

It seems that these days, "the AI effect" is cited as a reason to buy anything and everything, but in most cases, the difference between AI and existing computer technology is incremental at best. If the argument is that AI based load management or whatever will be an advantage for First Solar, then I don't see how it could be impactful enough to justify the stock doubling in three months. One could argue that all of that computing power out there will increase the demand for electricity, but again, will that double the business and profits of FSLR?

No matter how I look at it, a P/E of above 29 makes the stock look overpriced, even if there is the potential for pretty good revenue growth over the next year or so. And given that politics and the history of US/China relations both make that growth questionable, now looks like a good time to take my profit on FSLR and look for better uses for that capital.