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6 Solar Stocks Heating Up to Trade Higher - 43297 views
WINDERMERE, Fla. (Stockpickr) -- The ongoing nuclear crisis happening at Japan’s Fukushima Daiichi power plant has pushed one sector into the spotlight on Wall Street in a big way: solar stocks. Many investors believe that the nuclear meltdown in Japan is going to spark a rush into much safer forms of renewable energy, such as solar power. A catastrophic accident at Fukushima Daiichi would only give weight to this idea.
It is being reported is that Japanese officials are training workers to spray the Fukushima Daiichi nuclear power plant’s most damaged reactors with concrete to stop the release of more radioactive material. This move is very similar to what was done in the 1986 meltdown at Chernobyl in the former Soviet Union.
The major concern is that unless Fukushima can be brought under control, radiation will soon threaten Tokyo and other major cities. This is serious and could threaten the lives of hundreds of thousands of Japanese citizens. If you don’t think this threat is serious consider this: Early Monday, the Health Ministry advised a village of 6,000 people about 19 miles northwest of Fukushima not to drink any tap water due to elevated levels of iodine.
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We’ve seen now just how vulnerable nuclear power plants can be when natural disasters strike. Renewable power such as solar just doesn’t hold the same level of risk. By no means am I saying that solar can completely replace nuclear power, but traders are starting to place their bets that these stocks are going to win big off the Japan nuclear crisis.
The thesis here is that Japan is going to have to adopt solar power and quickly to make up for lost power generation from nuclear. Other counties will also increase their purchases of solar products as they delay any new nuclear plant construction. Germany, a country seen as a solar power stronghold, has already announced the closing of seven of the country’s oldest nuclear plants for three months while the government performs stress tests. It wouldn’t surprise me one bit to see other countries come out and introduce new subsidies or programs to encourage the use of more solar power in the coming months.
All of this could create the perfect storm for solar stocks. It doesn’t hurt either that the entire sector is filled with attractive stocks that are already trading at cheap valuations.
With this in mind, let’s take a look at a number of solar energy stocks that could be poised to trend significantly higher.
China-based ReneSola (SOL), a manufacturer of solar wafers and producer of solar power products, has a market cap of $782.60 million and an enterprise value of $983.15 million. The stock trades at an extremely cheap valuation, with a trailing price-to-earnings ratio of 4.65 and a forward price-to-earnings ratio of just 4.38. So far in 2011, this stock is up around 3.3%.
If you take a look at the chart for ReneSola, you’ll see that it recently started to break out above a bearish descending trend line on heavy volume. Volume last Tuesday registered about 8.4 million shares, almost twice the three-month average trading activity of 4.6 million shares. When a stock starts to move above a descending trend line that has acted as major resistance in the past, it can often signal that the stock is starting to enter a new bullish uptrend.
What market players should watch for now is for ReneSola to consolidate some of its recent gains between $9 to $8.50 a share. It could even fall to around $8 a share (its last major support zone) and still look okay, but I would prefer it hold $8.50. It would be productive for any consolidation to come on light volume, of around 2 million to 4 million shares. So far that’s exactly what has happened. Since that’s the case, you could buy the stock now using two different strategies. You could buy with a stop below $8 a share and add to the position as it moves above the 200-day ($9.50) and 50-day ($10.48) moving averages.
Or you could wait for the stock to take out the 50-day moving average on heavy volume and buy then. If it takes out that 50-day, I expect ReneSola to hit $13 to $14 a share pretty quickly. That’s a ton of upside using either strategy, so traders should definitely keep an eye on this name going forward.
SunPower (SPWRA) is a vertically integrated solar products and services company that designs, manufactures and markets high-performance solar electric power technologies. SunPower has a market cap of $1.41 billion and an enterprise value of $1.51 billion. This stock also trades at a very cheap valuation, with a trailing price-to-earnings ratio of 8.78 and a forward price-to-earnings ratio of 6.49. SunPower is off to a hot start in 2011, with shares already up around 19%.
If you take a look at the chart for SunPower, you’ll see that this solar play just broke above a major descending trend line and out of a downtrend channel that started back at the end of February. Shares had dropped from around $19.88 to a recent low of $13.91 a share. But now the stock is starting to move out of those resistance zones, and it’s starting to challenge its 50-day moving average of $15.42. This technically bullish move started on last Tuesday and was accompanied by heavy volume of 11.7 million shares, vs. the three-month average activity of just 3.3 million shares.
Many times when you see a big-volume move above a descending trend line, it sets the stock up to change its overall trend. What’s even more bullish about the chart for SunPower is that the stock has been making higher lows since last December. This means that every time the stock pulled back, investors paid up to own some shares. This shows that large institutional investors are eager to enter this name on any weakness.
Traders could buy this stock right now with a stop just under the 50-day moving average, at around $15. Or they could buy it on any weakness as long as it holds the uptrend line I drew in on the chart, which should be at around $14 a share. Either way, as long as the stock doesn’t move decisively back into the downtrend channel, then I think this name is getting ready to explode to the upside.
It’s also worth noting that this stock is among the most heavily shorted solar stocks. Around 28% of the tradable float is currently sold short, so a massive short squeeze could easily be set in motion if SPWRA continues to uptrend. I could see this stock challenging its next significant resistance level of $22.19 a share in short order.
JA Solar Holdings
JA Solar (JASO), a manufacturer of high-performance solar cells based in the People's Republic of China, has a market cap of $1.07 billion and an enterprise value of $1.24 billion. This is another extremely cheap solar stock, with shares currently trading at a trailing price-to-earnings of 4.41 and a forward price-to-earnings of 4.83. JA Solar is off to a slow start in 2011, with shares off by around 5%.
If you take a look at the chart for JA Solar, you’ll see that this solar player also recently started to break out above a descending trend line and out of a downtrend channel on huge volume. Last Tuesday, the stock started this bullish move on volume that registered at 23 million shares, vs. the three-month average trading volume of 10 million shares. This move initially took the stock back above its 200-day moving average of $7.01 but not its 50-day moving average of $7.31. Since then, the stock has gone back below the 200-day and is now threatening to fall back into its downtrend channel.
In order for me to warm up to this stock from the long side, it pretty much needs to stay above Friday’s closing price of $6.57 a share. Technically, it could find support at around $6.26 a share, but if it falls that low, it would negate everything I mentioned above. Out of most of the solar names I am currently watching, this is probably my least favorite technically. However, if it holds around $6.57, then you could buy the stock and start to add to your position as it moves above the 50-day and 200-day moving averages. I would add more if it takes out $8.57 and play this for at least a run back towards the 52-week high of $10.24 a share.
Yingli Green Energy
Yingli Green Energy (YGE), together with its subsidiaries, engages in the design, development, marketing, manufacture, installation and sale of photovoltaic products in the People’s Republic of China and internationally. Yingli Green Energy has a market cap of $1.80 billion and an enterprise value of $2.02 billion. Yingli Green Energy is far from expensive, with the stock currently trading at a trailing price-to-earnings of 8.37 and a forward price-to-earnings of 7.34. The stock is off to a solid start in 2011, with shares up around 16.7%.
If you take a look at the chart for Yingli Green Energy, you’ll see that the stock recently broke out of a downtrend channel and it moved above a bearish descending trend line. This move came on dramatic volume last Tuesday of 9.4 million shares versus the three-month average volume of just 3.9 million shares. The run also took the stock through its 50-day MA of $11.61 and 200-day MA of $11.32. Since then, the stock has slid back below its 50-day moving average, and it’s now trading just above the 200-day moving average.
My trading strategy with this one is pretty simple. You can buy this stock all the way down around $10.75 to $10.50 a share and then add to the position if it holds and takes out the 50-day moving average again. I really don’t want to get involved much below $10.50 because then the risk is that the stock will move back into its downtrend channel. At least from a shorter-term trading standpoint, I would like to see the stock stay out of that no-fly zone. If it does continue uptrending, though, I would add again once it trades above $12.30 and then add again if it moves above $13.59 and $14.29 a share.
My ultimate target would be close to $19 a share if the trend in YGE is truly about to change in favor of the solar stock bulls.
Trina Solar (TSL) is an integrated solar power products manufacturer based in China, with a global distribution network covering Europe, North America and Asia. Trina Solar has a market cap of $1.86 billion and an enterprise value of $1.54 billion. This is another inexpensive solar stock, with shares currently trading at a trailing price-to-earnings of 6.64 and a forward price-to-earnings of 6.01. Trina is off to a respectable start in 2011. with shares up around 13.3%.
If you take a look at the chart for Trina Solar, you’ll see that this solar stock has started to move above a major descending trend line and out of its downtrend channel that started back in late February. The downtrend channel on Trina Solar was so powerful that it sent the stock crashing from $31.08 to a recent low of $24 a share. Since then, the stock started a bullish move out of those bearish patterns on gigantic volume. Last Monday, 7.4 million shares traded, and last Tuesday, 8.1 million shares traded (both up days), vs. the three-month average volume of 3.5 million shares.
That initial bullish move took the stock back above both its 50-day MA of $27.31 and 200-day MA of $24.83. But on last Friday, the stock formed an engulfing bearish candlestick chart pattern that took TSL back below its 50-day. I am not going to get too concerned about this pullback unless we see volume pick up dramatically. I would be a buyer of this stock between $25.50 and $24.50 a share, with a stop right around the uptrend line I drew in on the chart near $24. I would then add to my position if the stock starts uptrending again when it moves back above the 50-day, and then when it trades above $29 a share.
First Solar (FSLR) is a major solar player engaged in the manufacture and sale of solar modules with an advanced thin film semiconductor technology. It also designs, constructs and sells photovoltaic solar power systems. First Solar is considered the best-of-breed solar name and has a market cap of $12.86 billion and an enterprise value of $12.95 billion. This stock isn’t exactly cheap, but it’s not really expensive either, with shares currently trading at a trailing price-to-earnings of 19.49 and a forward price-to-earnings of 13.53. First Solar is off to a robust start in 2011, with shares up around 15%.
If you take a look at the chart for First Solar, you’ll see that technically this is one of the bullish looking names in the entire solar complex. The stock has been in a longer-term rising uptrend channel for the past six months (SPWRA and TSL have similar patterns), where it has been making mostly higher highs and higher lows. However, recently the stock did enter a bearish downtrend channel as shares fell from $175.45 to a recent low of $137.10. That bearish trend didn’t last long for FSLR. The stock just broke out of that downtrend channel and back above a key descending trendline on absolutely monster volume.
Volume last Tuesday, when the stock started this bullish move, was 6.2 million shares vs. the three-month average trading volume of 1.7 million shares. That was the largest volume day this stock has seen since the end of April of last year. This basically means one of two things: Either everyone in the world who wants to own FSLR has already bought it, or large institutional money is moving into the name.
Considering the way the entire sector is trending and the way that oil is trending – when oil trends up solar tends to follow -- I suspect the latter is what's happening. I would look to buy this stock on any light volume pullbacks toward $145 to $138 a share. There’s a bunch of gaps in those price zones, so it’s possible it could fill those gaps entirely and take it back to around $140. That’s fine with me as long as the stock doesn’t trade below the uptrend line I drew in on the chart, which would be at around $138 a share.
Also, it’s worth noting that First Solar is another solar name that’s heavily shorted. The current short interest as a percentage of the float stands at a rather large 25.9%. This means that out of 57 million shares in the tradable float, around 14.69 are sold short by the bears. That’s not a large tradable float, so a big short squeeze could develop here if FSLR if the stock finds some buying interest.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.