Trade Idea: SolarCity
- Posted by Joe Fahmy
- on August 4th, 2013
I’ve been trading Solar City (Symbol: $SCTY) since about $12. It formed a rare, strong technical pattern off its IPO, which resulted in an explosive breakout from $20 to $50 in 5 weeks! Since then, it has consolidated nicely and continues to show great price action.
If you look at its Weekly chart (shown below), you will notice that all the big volume is coming on the “Up” weeks, and the “Down” weeks are on lower volume. This is a strong sign in my view. Its recent consolidation has occurred on 3 weeks of tight, low volume, which gives me the feel that the stock is being absorbed by the institutions and wants to move higher.
In interest of full disclosure, I currently own a position for my clients. I’m sure some of the objections to owning this stock will be 1) They have no earnings 2) This stock is too speculative and 3) How do I trade this when they have an earnings report coming out Wednesday, August 7th after the market close?
My first response is: YOU DON’T HAVE TO TRADE THE STOCK! As I always say, do what works for you! I am simply writing this post to show you some insights and reasoning behind why I take certain positions. Again, please don’t trade the stock if you’re not comfortable with it.
Now, going back to the objections 1) Earnings don’t matter as much to me when I’m dealing with newer entrepreneurial companies that are establishing themselves for the future (other examples include Amazon and Zillow) 2) ALL STOCKS ARE SPECULATIVE! Remember when we thought GE, Enron and Worldcom were safe? 3) For now, I am planning to hold a position over the earnings release, but it will be a position that I can accept a downside loss and not have it damage the portfolio. For example, when growth stocks report bad earnings, they usually gap down about 8-12%. Some drop as much as 20%. Because I am always thinking defense, I will hold a position that won’t damage the portfolio in case it gaps down 20%. For example, if you have a $100,000 account, you can take a 2.5% position ($2,500), so in case it drops 20%, you only lose 0.5% of your capital ($500). Hopefully, this makes sense.
Again, everyone trades differently and everyone has different investment objectives, so please don’t take a position if you are just looking to gamble over the earnings. To me, this is a stock that I am taking a calculated risk with, mostly based on the strong price action. In addition, I like $SCTY longer-term and I think it will see new highs before the end of the year. One last point, never bet against brilliant entrepreneurs like Elon Musk. Good luck trading!
I can be reached at: [email protected].
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Joseph Fahmy is the managing director at Zor Capital, LLC, a New York based investment management firm. Joe has over 17 years of trading experience...More »