Could Sell-Off in Solar Stocks be Creating a Buying Opportunity for Elon Musk's SolarCity (SCTY)?

Joel Anderson  |

Shares in Elon Musk’s SolarCity Corporation (SCTY) are dwelling in shadow on Wednesday as the stock plunged nearly 12 percent in anticipation of the release of its Q1 earnings report after the closing bell.

So far, though, investors hoping that turning over another page in the calendar might help the slumping SolarCity bounce back haven’t gotten their wish. The company’s stock is down over 45 percent now since the start of March.

One might be tempted to attribute much of the recent sell-off to a securities fraud class action filed against the company, but that was filed in early April and the decline clearly begins in early March. No, the bigger culprit is more likely the flight from growth stocks in general and the solar industry more specifically that has characterized the whipsaw market action in recent weeks.

A quick look at the stock chart for the Guggenheim Solar Trust (TAN) shows a pattern remarkably similar pattern to SolarCity’s movement. Since March 6, the ETF has shed nearly a quarter of its value. As such, fair or not, SolarCity appears to be falling victim to markets that tend to treat all solar stocks the same, with buying and selling trends rippling across the entire industry en masse.

And, as investors appeared to be fleeing the high-risk, high-reward plays that were so popular (and lucrative) throughout 2013, solar stocks took one of the hardest hit. The solar industry had been riding high over the 18 months preceding March, with TAN being the top-performing non-leveraged ETF of 2013.

And, while it would be easy to classify Wednesday’s big dip for SolarCity as investors anticipating a bad earnings report (and that could very well be a part of the picture), broader market moves would seem to indicate that SolarCity is, once again, getting caught up in an industry-wide slump.

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Major solar stocks are sharply down across the board on Wednesday, if not quite as sharply as SolarCity. First Solar (FSLR) plunged about 7.5 percent, the SunPower Corporation (SPWR) lost over 4.5 percent, Yingli Green Energy (YGE) was off over 6 percent, and TAN plunged nearly 4 percent as the tech/growth-heavy Nasdaq Comp. Index was down sharply despite a positive day for the Dow Jones Industrial Average (DJIA) and S&P 500.

But, it’s possible that this sort uniform buying and selling could be creating a buying opportunity for SolarCity. Obviously, the results of their earnings report are what’s really going to define any future movements, and negative results will almost certainly mean the stock’s going down even farther.

But SolarCity does represent a bit of a unique solar play. The company’s business model is built around leasing the panels and modules it builds, signing 20-year leases with home-owners and businesses to sell them power at discounted rates. The hope is that this will help draw more people to the benefits of the technology by removing the high entry costs of purchasing the entire array, which remains SolarCity’s property in their model. The company also has a lot of star power because of Chairman Elon Musk of Tesla (TSLA) fame, giving it a higher profile than its competitors.

And a look at certain technical factors could mean that today’s sell-off could be creating a coiling spring for the stock. Again, all is entirely contingent on the earnings report, but the stock is now trading below its lower Bollinger band, below a 14-day RSI of 30.0, and with a 14-day stochastic RSI of 0.00, all traditional signs that the stock is oversold.

In the event that the earnings report beats expectations (and, again, it can’t be emphasized enough that this is going to hinge on that report), the technical factors pointing towards a buy could mean that SolarCity’s bounce back will be a big one. Up until last quarter, the company had posted consistently increasing revenue, and had even swung into profit for Q3 of 2013.

Analysts are anticipating a loss of $0.74 a share, nearly double last year’s Q1 loss of $0.37 a share, and a 78 percent year-over-year increase in revenues to $53.59 million. Any beat will probably mean gains for the stock, but even a small one might get an extra boost after today’s big sell-off.

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