Evergreen Solar Looks Promising

07/21/06 08:29:15 AM

by Koos van der Merwe

With war in the Middle East and oil prices at high levels and extremely volatile at that, what are the alternatives to oil as a source of energy?

Security: ESLR
Position: Accumulate

Evergreen Solar is a developer and manufacturer of photovoltaic (PV) modules—the engines of solar electric systems—used in remote power and emerging grid-connected markets. The PV modules produced by Evergreen Solar (ESLR) are distinctive in their appearance because they incorporate proprietary crystalline silicon technology known as "string ribbon." The company, which was formed in 1994, is financed by institutional investors who specialize in growing successful energy and high-technology companies.

Interesting, but like other artificial energy producers, are they a flash in the pan with visions of hope, or are they a company that is energy's future? Their recent five-year contract of $200 million with SunEdison to ship photovoltaic modules makes me ask whether this is a must for my portfolio in a climate that is seriously concerned about a meltdown in the US economy. This contract with SunEdison is the fifth major contract the company has secured since November 2005. The value of these contracts totals more than $600 million over the next five years. What do our charts tell us?

FIGURE 1: EVERGREEN SOLAR, WEEKLY, WITH CUP & HANDLE. The stock came to market during a difficult phase, hitting a low point of 44 cents by October 2002. It has since recovered.

Graphic provided by: AdvancedGET.

Figure 1 is a weekly chart of Evergreen, which shows that the company came to the market in November 2000 at a price of $20.89. This in itself was very brave, as many companies withdrew their proposed listing as the market fell. As the market fell, so did Evergreen, reaching a low of $0.44 by October 18, 2002. The sophisticated investor probably bailed out of the company as the share recovered from $6.20 to $15.09, or it could have been investors who held shares in escrow, but whatever or whoever sold their shares short or as stop-losses were hit, the investment was a tragedy.

Since October 2002, however, those who believed in the company, whether they were insiders in the know or chartists looking for relative strength index (RSI) recovery buy signals, the stock price gradually started recovering and on rising volume, reaching a high of $17.58 by March 2006. In the process, the stock formed a huge cup and handle formation, suggesting a target, should the handle at $17.58 be broken, of $34.22. To determine this possibility, I then look at a daily chart to see what this tells me.

FIGURE 2: EVERGREEN SOLAR, DAILY. This chart shows a double bottom and a possible buy.

Graphic provided by: AdvancedGET.

The daily chart (Figure 2) shows a wave count suggesting that wave 2 of a major impulse wave upward is being completed. This is supported by the RSI buy signal that has been given, and by the double bottom that was formed as the possible low of wave 2. Volume fell as the price dropped, suggesting strength, and rose as the price rose, also suggesting strength. Had volume dropped with a rising price, this would have indicated weakness; nevertheless, cautious investors could wait for a break above the pivot point at 13.36 before buying.

With a long-term target of $34.22, short-term targets of $17.66 and $13.36, and with the very positive news, this is a share worth accumulating as it rises above $13.36. Those who are risk-averse could start accumulating now.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.