Solar stocks had been a great success story in the latest leg of the bull market. Solar City (SCTY) has captured its fair share of attention in the space as a result of Elon Musk’s involvement (Chairman and largest shareholder). The chart of the stock since its 12/12/12 IPO at $8 is nothing short of fascinating, up 1000% to its all time highs earlier this year in March, but now down 35% from those levels and flat on the year:
What’s interesting about the chart is that it has held the uptrend the entire way up, and buying the dip at the trend-line has resulted in gains of about 100% on average of the 4 major sell offs. This price action could, in large part, be the result of relatively tight ownership (Musk owns 23% of the shares outstanding) vs the high short interest at 22% of the float. As long as earnings losses continue in the manner they have and analysts expect them to, high short interest will be a fixture to the story, despite sales growth of 50% a year for the next few years.
While SCTY has been a terrific investment since its IPO, the stock’s performance in 2014 is in stark contrast to Sunedison (SUNE), which is up 43% on the year, but also up 1000% from its lows in 2012. SUNE, a manufacturer of polysilicon that goes into solar technology, and also now a major solar project developer, also loses money. The company’s longer history and varied businesses also means higher total sales than SCTY ($2.5 billion vs. $250 million), though both are around $5 billion market cap companies.
SUNE was recently the subject of takeover rumors by General Electric (GE), which were quickly denied, but much like SCTY, the largest holder of SUNE shares is not one that you would normally want to bet against – founder of Greenlight Capital, David Einhorn. We routinely see unusual options activity in the name, most of it bullish call purchases. Total open interest, calls outnumber puts 2.25 to 1, with 9 of the top 10 strikes of open interest are calls.
The chart of SUNE over the last 2 years, much like SCTY, is interesting, not only because it has held its steep uptrend till this past month, but also because it is today below its 200 day moving average for the first time since November 2012, nearly two years ago!!
Our only existing trade in the solar sector is a long put position in the solar etf TAN, which was originally a put calendar that Enis put on in mid-August. Enis is long the Oct 39 put for $0.78 through that position. The $36.60 low from May is the 6 month low in TAN.
Faltering momentum from some high growth sectors was a theme for the first five months of 2014. It didn’t take long for the broad market to shrug off weakening breadth and continue higher. However, as sectors like 3D printing and Cloud Software failed to make new highs with large cap tech and the S&P as a whole, a break in solar could be just another sign that investors are starting to re-adjust their risk posture for a more difficult environment in the coming months.