We have pointed out on more than one occasion of late that healthy bounces off of the May lows of hard hit high valuation stocks have been few and far between (NFLX & Z), with far many more within 10% of the May lows, like SOCL, TAN and SaaS stocks, (read here from Friday High Flyer Death Defyers).
Solarcity (SCTY) caught our eye as the stock’s nearly 50% decline from its all time high made on February 26th at $88.35 to its most recent intra-day low on May 7th of $45.79 now places it only 8% bounce from last month’s lows with the stock now flirting with some serious technical support.
The one year chart below is a textbook head and shoulders top formation with $50 serving as the neckline. We like to refer to this chart pattern as the “Triangle of Death” because when if it exits the triangle to the downside, they tend to gap and end up looking like WFM:
Taking a look at SCTY since the start of 2013, the stock had more than 600% gains to the all time highs. Now with the stock sitting on key long term support the stock seems poised to test the Sept 2013 breakout level closer to $40:
To be honest, this is not a stock that I know well, and the point of this exercise is to identify stocks with very poor relative strength to its peers and the broad market, but also hone in on good short candidates. The one problem with a cult stock like this is the involvement of Elon Musk. He is the largest shareholder at 23% of the shares outstanding, and the top 5 holders own a total of about 50%. So it is very concentrated. As is the short interest at almost 27% of the float. This stock is obviously prone to vicious short squeezes.
Which leads us to look at options in the name. Despite the precipitous drop of late, options on the stock are nearing 52 week lows and are priced below the actual movement of the stock over a 30 day period. The chart below of 30 day at the money Implied Vol (the price of options, blue line) vs the the Realized Vol (how much the stock is actually moving, white line) during that same period shows the relative cheapness of options for those looking to make directional bets:
For those who want long exposure in the solar space, FSLR looks like a far better value trading 13x next years expected earnings, and 1.5x expected sales, while SCTY’s earnings LOSSes are expected to double this year on a expected sales increase of 80% off of a very low base.