Time To Reverse A Very Successful Trade

Long-term regular readers will be aware that I have been consistently bullish on First Solar (FSLR) for a long time. The stock is up just over 155 percent in the last year, so that has been proven a good call, but, as the old saying goes, all good things must come to an end. It is time to take a profit on the stock, and the more adventurous among you may even want to consider reversing the position and selling it short.

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There are multiple reasons to believe that the great run the stock has enjoyed is coming to an end, but the market reaction to another huge EPS beat yesterday is first among them. After the market closed yesterday, FSLR reported earnings per share of $0.78. Estimates going in were varied and even the consensus number depended on who you followed and how they calculated the number. Zacks were expecting a loss of five cents, while other, broader based estimates were for a profit of about the same.

Either way, and even after some adjustment, the $0.78 result was spectacular and showed massive growth when compared to last year’s nine cents. The stock is reacting accordingly this morning, trading up at around $81. Dig a little deeper into the report though, and that looks like a big overreaction and a good opportunity to sell into the post-earnings pop.

The EPS somewhat overshadowed another, more worrying number. Revenue came in at $567.27 million, beating expectations but down over thirty-six percent from last year. The fact that those two results can coexist points to how complicated FSLR’s earnings are, but the stock’s performance to this point has been based on the potential of the business and a generally strong sentiment. This morning’s reaction is obviously limited by consideration of those disappointing year on year revenues, but the fact that traders are factoring that in is an indication that the gung-ho sentiment is also beginning to turn.

There are two main reasons that is happening.

The first is the most basic of calculations for any stock, value. At first glance the forward P/E of 23.7 doesn’t look too outrageous, but when you include projected growth to get a PEG ratio of just over 20 FSLR looks seriously overpriced. Now it should be said that the growth forecasts on which that number is based may be revised upwards in the light of another EPS beat, but the revenue miss will definitely weigh on those revisions.

The second reason involves projection and is therefore a little vaguer but could be even more impactful. To this point, my bullish stance has been despite what many have seen as a negative political environment for alternative energy in general, but at some point, the effects of deregulation and other policies designed to favor fossil fuels will be felt. The threat of a trade war doesn’t help either. The march of time and the fact that the U.S. is the only country moving backwards in those regards make it likely that the negative effects of those policies on FSLR will be temporary, but even so, holding on makes little sense.

I am not alone in this view. Analyst Michael Weinstein at Credit Suisse switched to a bearish stance a while ago, and in a recent note dropped his price target for the stock to $57. He based that on his view that the “…major catalysts are behind us”, which is Wall Street speak for growth is stalling.

When you are up over 150% on a trade in a year, it is tempting to just sit tight on the basis that even small percentage increases from these levels have a huge effect on overall profit. The fact is though that in the short to medium term, nothing moves in a straight line. First Solar has to this point climbed a wall of worry but has done so to appoint where valuation looks stretched. That makes it likely that should any of those worries start to look justified the correction will be swift and sharp. That then skews the risk/reward of a long position and makes short a much more attractive proposition.