Why Are These Solar Stocks on the Move?

At a time when the S&P 500 is relatively flat, shares of solar stocks SolarCity Corp (NASDAQ:SCTY), First Solar, Inc. (NASDAQ:FSLR), Sunedison Inc (NYSE:SUNE), and SunPower Corporation (NASDAQ:SPWR) are on the move. Let’s find out why and see if the smart money disagrees with the market on any of them.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see more details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

SolarCity Corp (NASDAQ:SCTY) fell by 20.7% in early morning trading after the solar panel installer reported a third-quarter loss of $2.41 per share on revenues of $113.86 million, missing profit estimates by $0.46 per share, but beating revenue estimates by $2.43 million. Guidance is a bit softer than expected with the company anticipating full-year installations of 878MW – 898MW, below previous guidance of 920MW – 1GW, and fourth-quarter loss per share of $2.60 to $2.75, below expectations of a loss of $2.17 per share. SolarCity isn’t growing as fast as it used to because its management wants to be cash flow positive by 2016 year-end so that SolarCity can “be in solid shape prior to the planned ITC expiration in 2017”. During the second quarter, although the number of funds (of the 730 we track) decreased to 34 from 36, the total value of their holdings in the stock increased to $1.28 billion (accounting for 24.60% of the float) from $1.02 billion.

First Solar, Inc. (NASDAQ:FSLR) is up by 10.5% after the thin film manufacturer reported third-quarter earnings of $3.38 per share on revenues of $1.27 billion (up 42.8% year-over-year), beating expectations by $1.83 per share and $160 million, respectively. Guidance is strong, with management expecting 2015 EPS between $4.30 and $4.50 and revenue in the range of $3.5 billion to $3.6 billion, versus analyst estimates of $3.43 and $3.57 billion. Bookings, a leading indicator of revenue, is solid too, with a record 1.7 GW added in the third quarter. Profits beat the estimates because capacity utilization increased by 17 percentage points year-over-year to 94%. Demand for thin film is stronger than expected and management is doing a good job at controlling costs. With good execution, First Solar’s rally can continue. A total of 30 funds reported stakes worth $281.51 million and accounting for 5.90% of the float as of the end of June, versus 30 funds and $278.21 million a quarter earlier.

On the next page, we examine why Sunedison and SunPower are moving.

Sunedison Inc (NYSE:SUNE) has declined by 4.44% after hedge fund manager David Tepper of Appaloosa Management denied building a stake in the solar stock on Friday. Tepper is famous for being a contrarian, having bought Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) equity securities at the depths of the financial crisis and making billions of dollars in profits on them when the prices of the securities rebounded. To many investors, Sunedison is in a similar situation to the financial stocks six years ago, as shares of the solar stock are down more than 75% from its highs, but still present solid value.  David Einhorn of Greenlight Capital, which owned 24.84 million at the end of June, thinks SunEdison has good long-term potential since it obtains an average return on capital of 10% in developed markets and 13% in emerging markets by selling solar and wind projects to “highly creditworthy counterparties”. Einhorn thinks Sunedison can earn $1.34 per share next year, assuming that TerraForm Power and Terraform Global “do not regain access to the capital markets”.

In a reversal from yesterday’s rally, SunPower Corporation (NASDAQ:SPWR) fell by 2.0% in morning trading on the back of SolarCity’s poor outlook. Because SunPower makes high efficiency rooftop solar panels that solar panel installers use, SunPower Corporation’s actual results could be softer than expected if solar panel installers such as SolarCity have a weaker outlook. Because solar stocks tend to move quickly one way or the other, it doesn’t take much to move SunPower stock up or down, although the long term fundamentals of SunPower is secure if it can maintain its efficiency lead and innovate. According to our data, hedge funds were bearish on SunPower Corporation (NASDAQ:SPWR) in the second quarter. A total of 17 funds reported stakes worth $114.72 million (representing 3.10% of the float) at the end of June, down from 35 funds and $219.84 million, respectively, at the end of March.

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