First Solar: An Energy Play, The Clean Way

Market Cap: 7.15B
Sector: Technology- Semiconductor Specialized
EPS Growth This Year: 37.7%
PE: 13.13
Gross Margin: 25.6%
LT Debt/Equity: 0.05


First Solar just reported a very strong quarter last week posting EPS of $1.60 per share, crushing analysts estimates of $.80 per share. A 100% upside surprise launched the stock more than +13% on Wednesday to new 52-week highs.

Its difficult to compare FSLR's financial metrics to its peers and not be a bit underwhelmed.
However the stock YTD has been the leading performer in the group returning more than 8% so far in 2016. One reason for this is likely their low debt relative to the group as many of the other major solar names sport risky debt/equity levels.

Whatever the reason may be the performance shouldn't be discounted. While the Solar sector has been broadly weak, First Solar has broken away from the pack and appears likely to continue trending higher.

As Oil has continued its decline, the Solar ETF TAN has moved right with it. The two are almost perfectly correlated over the past 52 weeks.

As you can see TAN and USO have traded in lockstep for the past year. The standout here however is the graph of FSLR which completely decoupled in October 2015. The performance of First Solar recently has been staggering vs the broad sector, and yet has rallied along with Oil when it makes its bounces. The differences between the two however is that the bounces in USO have led to lower lows while the rallies for FSLR have led to higher highs.

It makes sense that Solar and Oil trade similarly. When Oil is low there is less demand for alternatives. Likewise when Oil is expensive many seek renewable resources to lessen the burden of higher fuel costs. If Energy is set to recover which many feel it is, it would follow that the Solar stocks would be in line to recover as well.

When seeking an investment opportunity we want to look for relative out-performers. We want to own the best, otherwise whats the point of picking stocks? With that in mind here are the YTD comparisons between First Solar and some of the higher profile Solar stocks in the TAN ETF:

 Here is First Solar in green leading the pack by nearly a 20% margin so far in 2016. The next closest competitor is SEDG coming in at -12% YTD.

Playing an Energy recovery through a Solar company rather than an Oil specific company has several advantages:

-Less direct effect of the price of Oil on performance. FSLR has demonstrated since October that it can use bounces in Oil to rally strongly.
-Less direct risk to debt issues involved with the price of the Oil commodity. While a recovery in the price of Crude to ~$45-50/barrel would seem to benefit Solar stocks due to their high correlation, $45/barrel Oil is still generally below break-even pricing for most marginal US producers. This is likely to cause financial strain and potential bankruptcies on select companies. First Solar has already shown extremely low debt levels and the market seems to be rewarding that solvency.
-A growing movement toward alternative energy solutions tends to favor a company like First Solar.

First Solar Weekly chart

 Zooming out to view the last 5-years of FSLR's performance we can see that the stock has gained 600% since its 2012 lows. It has also been making a series of higher highs and higher lows during this timeframe. I particularly like that the stock has managed to regain support at the $60 level as that has been a key inflection point during this 5-year basing period.

The stock has also triggered an 18-month Double Bottom formation

 We can see the two recent lows from January 2015 and August 2015. These lows were accompanied by a positive momentum divergence and a strong volume breakout in December above the $61 level. Since December the stock has consolidated the recent rally and this week resumed to new 52-week highs on another surge in trading volume. Momentum is now in a bullish range and the stock continues to trend to higher highs and higher lows.

Our risk management is very simple for this trade. If the stock fails this high and falls below the most recent "higher low" the new trend would be invalidated and we would step aside. We also received a nice low volume pullback on Friday making our entry here even more favorable. We will place stops at $61 on a weekly closing basis with initial price targets at $100. This sets up a potential $30 gain for a $9 risk. With positive price action in place that is an easy risk for me to take.