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I have mentioned the daily scans I run in this column on several occasions. In addition to the daily charts, I run the same scans on a weekly basis with the same set of criteria only I use weekly indicators instead of the daily ones. I don’t take the scans as the gospel when a stock appears on the bullish or bearish list, regardless if it is the daily scan or the weekly scan. When a stock appears on any of the lists, it is a starting point. The appearance on the list brings the stock to my attention so that I can delve deeper into the analysis and see what is going on with the charts, what the sentiment picture looks like and look at the fundamental picture.
For instance, First Solar (NASD: FSLR) appeared on the weekly bearish scan this past weekend. At first glance, the weekly chart shows that the stock has just come out of an overbought status and just hit the upper rail of its trend channel. Does this mean I short the stock? I wouldn’t. At least not at this time.
The stock has been in an upward trend for almost two years now and is due for a downward cycle within the trend. But that doesn’t make the stock a great candidate for a bearish play, at least not to me. I look for a downward sloped trend channel where the stock his hitting the upper rail. That is the ideal bearish opportunity—at least from a technical perspective. Once I find that, then I look at the sentiment and the fundamentals.
Looking at the fundamentals for First Solar stock, the company hasn’t performed all that well in the past few years. The average EPS growth rate over the last three years has been -13% and the average sales growth rate for the past three years is only 13%. The company needs to improve its performance as it seems the stock has been moving higher based on the push in solar technology more so than on its performance to date.
The sentiment indicators toward FSLR show that there is some skepticism toward the stock. The biggest source of skepticism comes from the analyst ratings. There are 20 analysts following the stock with four “buy” ratings, 12 “hold” ratings and four “sell” ratings. The leaves plenty of room for upgrades should the company start performing better.
Here is how I would look to play First Solar stock at this time. I wouldn’t sell the stock short, but I also wouldn’t want to buy it right now. I would wait for a pullback before buying the stock. In the meantime, I would sell puts down at the $52.50 level to collect premiums. If the price drops down to this level and the stock gets put to us, we are buying at a price near the lower rail and at a point where the stock would likely be oversold rather than overbought. Selling puts allows investors to collect premiums on a stock they want to own, but want to own it at a lower price. Rather than just waiting for the price to drop, collect some premiums while you wait.
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