Evergreen Solar, Inc. (NASDAQ: ESLR) plunged to an all-time low of $3.30 on Tuesday, thanks to the widespread ripple effect caused by Lehman Brothers' bankruptcy filing. As Evergreen confessed to a potentially substantial Lehman-related loss, analysts rushed yesterday to hand out price-target cuts. Today, Citigroup bucked the trend by upgrading ESLR from "sell" to "hold."
The bullish note seems primarily based on increased transparency regarding the Lehman situation, as well as a sharp decline in the stock's valuation. In a note to clients, Citigroup clarified, "With ESLR more clearly defining its exposure to a Lehman Bros. bankruptcy, the worst-case scenario is now well-defined . . . these issues appear much better discounted at current levels."
In response to the upgrade, ESLR has added more than 13% today. The shares are trading around the $5 mark, though, which puts them in territory not previously explored since May 2005. The stock's year-to-date loss now totals 75% -- a stomach-churning plunge, for sure, but the stubbornly bullish sentiment among investors suggests that more downside may be in store for Evergreen Solar.
For example, the International Securities Exchange (ISE) reports that ESLR has racked up a 10-day call/put ratio of 2.33. In other words, option players have bought more than two bullish contracts for every one bearish bet during the past couple of weeks. Likewise, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.31 reveals that call options more than triple puts among contracts slated to expire within 3 months.
In the soon-to-expire September series, peak call open interest lies at the 10 strike, with 22,551 contracts in residence. It seems safe to assume that the bulk of these contracts will expire worthless at the end of this Friday's trading -- as will the 13,047 open positions on the September 12.50 call. If ESLR continues to flounder on the charts, some bullish option traders might close out their call trades, thereby applying additional selling pressure to the stock.
And it's not just option players who could punish the stock if they reconsider their optimistic stance. Even after yesterday's tidal wave of price-target cuts, ESLR's average 12-month price target still stands at $12.13, according to Thomson Financial. This represents a lofty premium of 176% to the shares' closing price on Tuesday, which suggests that further price-target reductions are highly likely in the coming weeks. Any cautious notes from analysts could draw new selling pressure to the equity.
Today's spike higher aside, it looks like ESLR will continue to struggle on the charts during the near term. With troubling fundamental issues and Lehman-tainted losses on the horizon, it looks like many Evergreen bulls will be forced into reevaluating their opinion of the beaten-down solar stock sooner rather than later.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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