SunPower: Risks Rise Before Gains, Stocks Near Support (NASDAQ: SPWR)

Mike Zaccardi, CFA, CMT profile picture

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The midterm elections are just around the corner. Right now, traders see the likelihood of a red wave in Congress. Could that mean less in the way of positive investment in clean energy? Maybe. The SPDR S&P Kensho Clean Power ETF (CNRG) has endured significant relative weakness since mid-September, when the tide began to turn against the Democrats in the election prediction markets. One of the fund’s largest holdings has a key earnings report next week.

Clean energy stocks have fallen relative to the S&P 500 since mid-September

Clean energy stocks have fallen relative to the S&P 500 since mid-September

StockCharts.com

According to Bank of America Global Research, SunPower Corporation (NASDAQ: SPWR) sells and installs solar panels for residential customers. Total SA, one of the world’s largest integrated oil and gas companies, owns 57% of SunPower. It operates through Residential, Light Commercial; Commercial and Industrial Solutions; and Other segments.

The $3.2 billion market capitalization California-based electrical equipment industry company within the industrial sector has negative GAAP earnings for the past 12 months and pays no dividend, according to The Wall Street Journal. Importantly, ahead of next week’s earnings, the stock is high short as a percent of float with a current reading of 14.3%.

SunPower had some tailwinds earlier this year, signing an impressive deal with IKEA and potentially benefiting from the Inflation Reduction Act (IRA). However, the headwinds could be increasing. California’s net metering 3.0 program could pose problems, while macroeconomic risk around a sharp drop in new home sales is likely to put pressure on the company’s results in coming quarters. In July and early August, mortgage rates were much lower than current levels of 7%. This sneaky exposure of the real estate market is worrying. Uncertainties in China are another variable.

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Still, there is a potential advantage of a better pricing environment and lower input costs that could increase margins and lower customer acquisition costs.

Valuation-wise, BofA analysts see this year’s earnings per share in the red, almost unchanged from 2021’s losses. However, the Bloomberg consensus forecast is more optimistic for this year and into 2024. With a recent negative cash flow slowly turning positive, don’t expect a dividend anytime soon.

Seeking Alpha rates the stock with a low D+ valuation rating, but growth prospects are high with an A+ rating. Given that tandem, I like to look at the PEG ratio going forward: that metric is high, close to 4.0, well above the industry median. Overall, the valuation still looks rich to me ahead of Q3 results.

SunPower: Earnings, Valuation, Free Cash Flow Forecasts

SunPower: Earnings, Valuation, Free Cash Flow Forecasts

BofA Global Research

Looking ahead, Wall Street Horizon corporate event data shows a confirmed Q3 2022 earnings date of Tuesday, Nov. 8, before the open, with a conference call immediately after the results are released. You may listen live here. The schedule is light apart from Tuesday of next week.

Corporate Events Calendar

Corporate Events Calendar

wall street skyline

The angle of the options

Delving into the earnings report, data from Option Research & Technology Services (ORATS) shows a consensus EPS estimate of $0.07. That would be almost unchanged from $0.06 of earnings per share in the same quarter last year. SunPower has a strong track record of earnings growth rates, with the company beating forecasts in nine of the last 10 reports. Unfortunately for the bulls, the stock has traded lower after gains after four of the last five earnings releases.

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ORATS also shows an expected stock price swing of 11.1% after Tuesday morning using the nearest expiration at-the-money straddle. While it is below last quarter’s implied change, it is higher than what was seen earlier this year and since the Q2 2021 report. Interestingly, SPWR does not have a history of major price changes for Stocks related to earnings of late, so selling options might make sense here.

SPWR: Expensive Earning Options

SPWR: Expensive Earning Options

ORATES

The technical take

SPWR had broken above a downtrend resistance line around the IRA news and its Q3 report in late July and early August. So I suggested expanding on that technical premise, which worked for a while. The stock rose from almost $20 to more than $28. However, gains were limited there as a market sell-off, ongoing housing market turmoil and China fears hurt SPWR. The stock was nearly halved to its recent low near $15.

Notice how there is now significant ‘price volume’ in the $20 to $23 range, and the major moving averages for the stock are either flat or trending lower. Those are bearish signs. On the upside, $15 is support followed by the May low just below $13. Going long here might make sense, targeting the $20 lows, but I would hold off for now given some of the technical changes.

SPWR: a rally burns down

SPWR: a rally burns down

StockCharts.com

The bottom line

SunPower has increasing risks compared to a few months ago. Its valuation remains high and technicals have turned more bearish. I’d steer clear of stocks for now after a breakout and crash during the third quarter.

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