February 24, 2010 – On February 2 we suggested that selling puts on First Solar (Nasdaq:FSLR) was an attractive strategy for the following reasons (see previous commentary):
• We are long-term bullish on the company – market leading position in solar, which continue to believe is a long-term growth industry;
• We would like to be long First Solar at lower levels – selling puts on the stock, at lower prices than the stock is currently trading at results in receipt of premium (price put sold for) to take on the obligation to buy the stock at a lower price in the future.
We recommended selling the June 100 puts for about $10.10 when the stock traded at $108, which would result in either (a) pocketing the premium (or the difference between the premium and the closing purchase price if you choose to buy the stock pre-expiration date) if the stock maintains above the $100 level until the expiration date on the put in June; or (b) getting put the stock at a cost average of about $90 should the stock trade below $100 resulting the it being put to you.
Given the fact that we are long-term bullish on First Solar, and the proposition of getting put the stock at $90 (which would have resulted in buying it at slightly more than 13x FY10 projected earnings and slightly more than 10x FY11 project earnings) is an attractive entrance point (all things being equal), we liked the either-or –scenario, and it paid off if you sold the put, and then bought it back when we suggested that being a good idea on February 18, resulting in a 50%+ gain on the trade.
Well, the stock hit $105 yesterday and we like the strategy again at current levels. The June 100 puts traded yesterday at about $12.50.
We actually sat in on First Solar’s presentation yesterday at the Piper Jaffray Fifth Annual Clean Tech Conference in NYC, and continue to think the company is extremely well-positioned. The stock has been under pressure (as with the solar group in general) due to concerns about Germany reigning in its Feed-in-Tariff, and potentially about the impact of a softening euro on earnings. But the company’s forecasts are, in its own words, conservative.
For example, its guidance assumes spot prices of silicon at $40/kg and it also assumes a sub $1.30 euro price. Meanwhile, it maintains a stellar balance sheet (contrast its $900M or so in net cash vs. the negative $5 billion or so that the next five largest solar companies have), and a 16% market share, with its systems business poised to help compensate against pressures felt by the situation in Germany. We like the stock, and we love it at $87.50, which is where you would own the stock if it were put to you at the $100 put price (assuming $12.50 premium paid).
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