Will First Solar Options Heat Up?
Options Plays by Better Trades
April 8, 2009 -
When oil prices soared to $147/bbl in the summer of 2008, global hysteria
wrought a renewed push for renewable energy sources.
After last summer's all time record high crude prices, demand destruction
dropped the price per barrel near $30. But the inflation play is heating back
up with Helicopter Ben and the Treasury Department dumping dollars into the
economy like a pair of drunken benefactors.
Oil now trades above $50/bbl for the first time since last November despite
crude inventories rising to a 16-year high on April 8th. Speculators are
clearly pricing in future effects of expansionary monetary and fiscal policy.
Will bubbling oil prices and an eco-friendly President spark the same
interest in alternative energy sources this time around?
President Obama's fears that America is falling behind in solar production
capacity are well founded. China-based Suntech Power's (STU) Gemini Solar
Development joint venture with MMA Renewable Ventures is aggressively chasing
a 30-megawatt project for the Austin utility. Spanish-owned Fotowatio is
pursuing the purchase of MMA. German-based Q-Cells and SolarWorld AG are
rapidly growing photovoltaics as well.
Tempe, Arizona based First Solar recently purchased OptiSolar's $400 million
power project portfolio. First Solar is increasingly moving away from the
residential market, evidenced by its 10-megawatt plant constructed in Nevada
to sell electricity to Pacific Gas and Electric (PCG).
Solar panel producing competitors SunPower and Suntech Power are transitioning
to large-scale energy production projects as well. SunPower procured a big
deal to construct a 25-megawatt power plant for Florida Power & Light.
The newly-instituted 30% federal tax credit for utility providers who meet
requirements for obtaining energy from renewable sources will grant an
enormous growth opportunity to solar power producers.
On March 24, American Technology Research reiterated its buy rating for First
Solar and identified a $184 price target for the company. Analyst John Hardy
noted that Amtech is "applying a 20x multiple to FY10 EPS estimate of $9.20".
Conversely, Collins Stewart cut First Solar to hold on March 30 and Barrons
noted on March 29 that solar panel makers like First Solar and Energy
Conversion Devices' margins could be pressured by silicon-based solar devices
as silicon prices fall.
Because the inflation play is gearing up and analyst opinion is clearly mixed
on the solar space, an emerging opportunity for a straddle strategy is
presenting itself. If inflationary pressures subside, solar stocks could fade
back out of consciousness. But if energy prices heat up, a renewed push for
alternative energy could help propel solar stocks again.
By entering into a long straddle position, where the trader buys both a call
and put option on the same stock with the same strike price and expiration
date, profits could be captured on a breakout in either direction. The key to
straddle positions on alternative energy stocks is to get options with a lot
of time value, giving the trade room to breathe.
The Treasury and Federal Reserve have pulled out all the stops to reignite
the furnaces of growth. A looming shadow of inflation is making its way down
the pipeline. While $147/bbl oil isn't likely for 2009, inflationary
pressures have seeped back into mainstream consciousness. Solar names might
ride the heat wave.
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