Not all Solar companies are created equal, those like SunEdison (SUNE) who have, and FirstSolar (FSLR) and Sunpower (SPWR) who have recently announced plans for a Yieldcos* (read our discussion here and below) have dramatically outperformed those without like SolarCity (SCTY). Now to be clear SUNE, FSLR and SPWR primarily in the manufacturing business, while SCTY offers services to individuals or businesses. Often times investors lump stocks together that have similar roots in there names despite being in fairly different businesses.
FSLR, SPWR & SUNE are all up 45 to 70% off of their 52 week lows, largely as a result of the potential for their higher yielding entities which can assist in funding projects, while SCTY appears to be suffering from poor sentiment related to lower energy costs making solar projects less attractive. SCTY is now up only about 10% from it’s 52 week lows:
While $50 looks like pretty healthy support, the stock’s inability over the last five months to hold any meaningful bounce above $50 is fairly distressing, especially considering the recent bounces from its peers. On a longer term basis, the significance of $50 is clear it is the neckline for a massive head and shoulders top, which most of you probably know as the Triangle of Death.
You guys know the drill on this one, the stock’s 31% short interest is nearly matched by the steadfastness of the company’s chairman Elon Musk, and the stock’s largest shareholder’s 21% stake. Tough to short a stock like this where the largest holder will never sell. But as we have seen in stories like Herbalife (HLF) and Lumber Liquidators (LL), sometimes the shorts get it right, no matter who is on the other side of the trade.
We don’t short stocks like this without a high level of conviction, and even when you have that it can be a nightmare. What we do here are look for defined risk plays that offer attractive potential risk reward outcomes. With earnings out of the way, options prices have come down considerably, with 30 day at the money implied volatility nearing 52 week lows:
We don’t have a strong fundamental view on the stock at the moment, but the more the stock probes $50 on the downside I would suggest the greater the break down may be when it finally succeeds. While options look cheap in vol terms, they do not exactly scream cheap in dollar terms. For instance with the stock at $50.40 the April 2nd weekly 50 puts are offered at $2.60, or about 5% of the underlying stock price.
Although the technical set up combined with relatively cheap vol, could be enough to get us interest.
* Description of YieldCos from Forbes.com:
A Yieldco or yield company is a separate corporate subsidiary set up by energy companies to transfer a portfolio of operational energy projects. Yieldcos are typically listed after they are spun off from their parent companies and offer among the lowest costs of equity funding for renewable energy projects. The reasons for the low capital costs are manifold. These companies generate stable cash flows by selling electricity under power purchase agreements with utilities and distribute most of the cash through quarterly dividends. While yieldcos are currently subject to corporate taxes, there can be tax advantages depending on the yieldco’s structure. The Yieldco model also allows investors to single out the cash flows generated by the power plant assets without giving investors exposure to other aspects of the parent company’s business. Additionally, Yieldco investments are relatively liquid, since they trade in the open markets.