First Solar And Sunrun: A Renewable Energy Pair Trade From Credit Suisse

When the stock market becomes unpredictable and volatile like it did last week, traders often turn to pair trades to mitigate risk. One Wall Street analyst sees a pair of solar stocks that could form the basis for a solid 2018 pair trade.

The Analyst

Credit Suisse analyst Michael Weinstein has an Underperform rating and $55 price target for First Solar, Inc. FSLR and an Outperform rating and $15 price target for Sunrun Inc RUN.

The Thesis

First Solar stock has simply become too pricey, while Sunrun is establishing itself as a market leader in residential solar, the analyst said. (See Weinstein's track record here.) 

First Solar is making all the right moves from a business standpoint, transitioning to Series 6 technology while maintaining a healthy balance sheet, Weinstein said. But  with the stock up 111 percent since May 2017, the analyst said the impact of the new solar import tariffs is already completely priced into First Solar stock, leaving very little room for upside.

Sunrun, on the other hand, is down 0.8 percent in the past year despite evidence of market share gains in residential solar and a transition to positive free cash flow less than one year ago. While First Solar is fully valued, Weinstein said Sunrun now trades at a significant discount.

“We estimate the net retained value of leased assets at a 6-percent project discount rate is $1.18B, or $10.3/share ($818m, or $7.1/share, at an 8-percent discount), thus implying that the current stock price gives little value to growth as a function of addressable residential market share,” Weinstein said. 

Price Action

Traders who took a short position in First Solar and a long position in Sunrun are off to a good start Monday with their pair trade. Sunrun shares were up 12.20 percent Monday afternoon, while First Solar was up 3 percent. 

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