As an investor, are you more afraid of the fallout from credit spreads or are you more afraid of missing the market bottom? The battle between fear and greed on global stock markets has led to many casualties this week, including FirstSolar (FSLR – Last trade $104.54).
Buy the rumor: Since the last time we wrote a bullish note on FSLR, the share went from a low of $106.51 on July 20 to a high of $123.21 on July 31. There is no doubt in my mind that investors pushed FSLR higher on rumors/expectations of strong results that intensified as the earnings date approached. The manageable volatility during that time gave (greedy) investors confidence to push the share higher.
Sell the news: The VIX index, which shows the market's expectation of volatility, increased from a low of 15.36 on July 20 to a high of 24.17 on July 29. The increasing market volatility, a byproduct of the subprime mess, left FSLR vulnerable to a "sell on the news" price action. That's exactly what happened. Despite announcing vastly improved Q2 results, FSLR dropped 4.3% on the day after its earnings.
Other bloggers have pointed out that there is no way of knowing how much FSLR is worth. For a stock that has climbed more than 370% in the past six months, fundamentals may have little to do with how it trades. The consensus seems to be that its current earnings are worth somewhere between $5.00 and $10.00 per share. The other $100 per share or so is what the market is willing to pay for growth, and investors have started repricing this growth with the recent increase in market volatility. Should you exploit this pullback and add on to FSLR positions?
If we look at FSLR fundamentals and ignore the current market turbulence, the answer is a resounding YES. To read our other notes on FSLR click here, here and here.
There are quite a few bullish catalysts going forward. FSLR revealed during their conference call that they produced 6.1 megawatts at their German plant, but only shipped 4.1 megawatts of modules. If they had to sell this inventoried production at the current rate of $2.37/watt it would've contributed $4.7 million of revenue to 2Q07 results. Given the strong demand for FSLR's modules, it seems likely that the inventoried production will be sold in 3Q07. The sale of inventoried production, combined with an on schedule ramp of the company's German factory, should add some upside to Q3 earnings going forward. But higher costs, especially stock option expenses, may limit near-term EPS upside.
Management raised its FY07 revenue guidance to range between $400 million and 415 million, compared to their prior guided range of $370 million to 400 million, primarily due to higher expected production. In addition, there is continuing chatter that FSLR may announce a major U.S. contract soon, and such an announcement should keep the share well supported above $100.
Company-specific fundamentals aside, I would be hesitant to buy FSLR right now. I think the credit market may see more bad news, as August has traditionally been the least liquid month for bonds. Due to expectations of more upcoming volatility, it seems unlikely that we'll see a rapid recovery in equities.
The current fiasco seems to have started with news that the highly-leveraged Chrysler buyout deal couldn't finalize funding. In a similar way, a leveraged buyout boom in the 1980's came to a sudden halt when a planned buyout of UAL, the parent of United Airlines, could not be financed. The S&P 500 fell 6.0% in one day when that was announced, but regained all the lost ground within 12 weeks. It might be too early to say that history will repeat itself.
Disclaimer: I do not own FSLR. I do not own a solar panel.