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Brand Face-Off: First Solar, Inc. (FSLR) vs. SunPower Corporation (SPWR)

Evaluating FSLR and SPWR from technical and sentiment viewpoints

by 10/14/2013 11:59:32 AM
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When it comes to identifying the market leaders in solar technology, First Solar, Inc. (NASDAQ:FSLR) and SunPower Corporation (NASDAQ:SPWR) are two names that come to mind. Both companies specialize in designing, manufacturing, and selling modules that convert sunlight into electricity. Both have also mustered brow-raising performances on the charts. So is there any differentiating between the two? That's what we're here to decide, using our contrarian methodology as a primary guide.

Daily Chart of FSLR since January 2013 With 20-Day Moving Average

Daily Chart of SPWR since January 2013 With 80-Day Moving Average

As alluded to earlier, FSLR and SPWR are technical titans. First Solar has tacked on over 41% year-to-date, and an even more impressive 97% year-over-year, to $43.56. Surprisingly, SunPower has topped those numbers, adding close to 429% and 534% to $29.72, during the same respective time frames -- and even hitting a four-year high of $30.10 today. The same is true for each security on a short-term, relative-strength basis. Compared to the broader S&P 500 Index (SPX), FSLR holds a 10.3 percentage-point advantage during the past two months, while SPWR boasts a 32.1 percentage-point lead.

Truth be told, there was a time when the two solar firms were running roughly neck-and-neck. However, a pair of fundamental factors allowed SPWR to gain an upper hand. Specifically, in early June, FSLR announced it was offering 8.5 million common shares at $46 apiece to raise funds for general corporate purposes -- an announcement that was met with a bearish gap. Then, a second-quarter earnings miss on Aug. 6 led the stock to gap lower once again. Despite these setbacks, FSLR has recently found a firm layer of support in the form of its 20-day moving average. Meanwhile, SPWR has spent the majority of the past 52 weeks atop its 80-day moving average, which has cushioned a handful of pullbacks over the last several months.

From a sentiment perspective, the two stocks have received mixed reviews. For starters, at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), First Solar's 10-day call/put volume ratio stands at 4.59, meaning traders have picked up nearly five calls for every put during the last two weeks. This ratio is higher than 97% of similar readings taken in the previous 12 months, suggesting speculators have been buying to open calls over puts at a near-annual-high pace.

Meanwhile, although SPWR's 10-day ISE/CBOE/PHLX call/put volume ratio is 2.27 -- meaning long calls have more than doubled puts during the most recent two-week time frame -- the reading is just 15 percentage points shy of an annual nadir. In other words, traders have rarely been as bearishly skewed toward the solar name as they are now (although some of the long puts may actually be intended as downside protection). Still, from a contrarian perspective, an unwinding of those pessimistic bets -- particularly in the face of SunPower's continued technical strength -- may end up benefiting the shares down the road.

Elsewhere, FSLR joins SPWR in being plagued with doubt. Among the brokerage bunch, First Solar has received just two "strong buy" ratings compared to 13 "holds," one "sell," and one "strong sell" recommendation. What's more, the stock's consensus 12-month price target of $41.61 stands at a discount to its current per-share price. Likewise, six out of 10 analysts covering SunPower assign it a tepid "hold" or worse suggestion, and it's currently trading above its average price target of $28.08, as well. Long story short, both solar names appear primed to benefit from a round of analyst upgrades and/or price-target hikes.

In addition, short interest levels are high for our under-the-microscope stocks. Over 15% of FSLR's float and nearly 28% of SPW's float are currently sold short. Thus, there's plenty of sideline cash available to propel equities northward, should their continued technical outperformance spark a short-covering rally. What's more, some of the recent call speculation on this pair of names may be the work of these short sellers looking to hedge their bearish bets.

In conclusion, First Solar, Inc. (NASDAQ:FSLR) and SunPower Corporation (NASDAQ:SPWR) are alike in many respects. Both have been coasting up the charts for a while, and both feature enough skepticism to set them up for potential contrarian boons. But if push comes to shove, given its extreme levels of outperformance and a greater degree of pessimism among option traders, SPWR probably deserves the tie-breaker advantage.


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