Investors
looking for recent headlines on Enphase Energy (ENPH:
Nasdaq), a developer of solar power generation and
storage solutions, will need to sort through dozens of press releases calling
for shareholders to joint class action lawsuits against the company. A short-seller report published the third
week in June 2020, splashed blood in the water for law firms specializing in
suits against public companies. The report,
which has since been dismissed by sell side analysts following the company,
alleges that Enphase has engaged in accounting fraud by falsifying revenue
reported in fiscal year 2019. The public
accounting firm Deloitte Touche, which just completed an audit of that twelve
month period in February 2020, may also disagree.
Publication of short-seller reports has become an art form for traders who see opportunity in an overbought stock. Indeed, by mid-May Enphase shares had climbed to a 52-week high of $70.36 largely on a favorable first quarter financial report that included an upside surprise in cash flow generation. The shares had shot through a line of strong volume-related price support-resistance at the $60.00 price level. Profit taking and U.S. equity market turmoil appears to have brought the stock back down to another significant line of volume-related price support at the $47.00 price level. The short-seller report attracted exceptional trading volume on June 17th when it was published, leading to a deep sell off to the $40.00 price level.
Sell side
analysts who follow the company as well as television pundits immediately took
exception to the validity of the short-seller's analysis. One sell-side firm even increased its rating
to buy from accumulate on the price decline.
All mentioned pricing power, the ability to expand gross margins and
cash flow generation as reasons to like Enphase.
The shares closed last week just under the $47.00 price level. That unfortunately may reinforce that level now as a potential line of resistance to price recovery.
The most recent
clue to Enphase’s market penetration is an announcement last week that its most
recently introduced Enphase IQ-7+
microinverters will be used by systems integrator Excel Power in a system that
will be installed by Wippells Autos, a Jaguar and Land Rover dealership in
Queensland, Australia. The Enphase IQ-7+ is intended for high-power
residential and commercial solar applications up to 450 Watts and features a
polymeric enclosure and cabling to simplify installation. Excel’s installation provides a view on
Enphase’s strategy of leveraging distribution relationships to reach a wider
audience for its technologically leading edge products.
How should
traders view the most recent gossip and resulting price movement? One of the sell-side analysts characterized
the short-seller report as ‘specious’, but even so it should not be
ignored. Even if entirely falsified itseslf, the short-seller report has triggered headline grabbing legal action that could serve to depress
interest in the stock over the coming months.
That said, taking long positions in stocks is often best executed with
the shares appear oversold as ENPH is now.
Traders should also note that the supply of ENPH shares triggered by the
short-seller report may not have been fully absorbed by the market. The situation suggests trading conditions
could remain weak for several more sessions, providing an opportunity to
accumulate shares without driving the stock price higher.
Neither the author of the Small Cap Strategist web
log, Crystal Equity Research nor its affiliates have a beneficial interest in
the companies mentioned herein.
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