Trade-Ideas: SolarCity (SCTY) Is Today's

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer.

Trade-Ideas LLC identified SolarCity ( SCTY) as a "roof leaker" (crossing below the 200-day simple moving average on higher than normal relative volume) candidate. In addition to specific proprietary factors, Trade-Ideas identified SolarCity as such a stock due to the following factors:

  • SCTY has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $101.3 million.
  • SCTY has traded 2.0 million shares today.
  • SCTY is trading at 1.85 times the normal volume for the stock at this time of day.
  • SCTY crossed below its 200-day simple moving average.

'Roof Leaker' stocks are worth watching because trading stocks that begin to experience a breakdown can lead to potentially massive losses. Once psychological and technical resistance barriers like the 200-day moving average are breached on higher than normal relative volume, the stock may then be subject to emotional selling from investors that can continue to drive the stock lower. Regardless of the impetus behind the price and volume action, when a stock moves with weakness and volume it can indicate the start of a new, potentially dangerous, trend.

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More details on SCTY:

SolarCity Corporation designs, manufactures, installs, maintains, monitors, leases, and sells solar energy systems to residential, commercial, government, and other customers in the United States. Currently there are 6 analysts that rate SolarCity a buy, no analysts rate it a sell, and 3 rate it a hold.

The average volume for SolarCity has been 2.5 million shares per day over the past 30 days. SolarCity has a market cap of $5.7 billion and is part of the technology sector and electronics industry. The stock has a beta of 2.95 and a short float of 35.9% with 11.77 days to cover. Shares are up 8.9% year-to-date as of the close of trading on Friday.

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TheStreetRatings.com Analysis:

TheStreet Quant Ratings rates SolarCity as a sell. The company's weaknesses can be seen in multiple areas, such as its generally high debt management risk, disappointing return on equity, weak operating cash flow and poor profit margins.

Highlights from the ratings report include:
  • The debt-to-equity ratio is very high at 2.41 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Along with the unfavorable debt-to-equity ratio, SCTY maintains a poor quick ratio of 0.95, which illustrates the inability to avoid short-term cash problems.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Electrical Equipment industry and the overall market, SOLARCITY CORP's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has significantly decreased to -$171.28 million or 634.86% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • The gross profit margin for SOLARCITY CORP is currently lower than what is desirable, coming in at 32.25%. Regardless of SCTY's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, SCTY's net profit margin of -31.89% significantly underperformed when compared to the industry average.
  • SOLARCITY CORP has improved earnings per share by 15.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, SOLARCITY CORP continued to lose money by earning -$0.63 versus -$0.81 in the prior year. For the next year, the market is expecting a contraction of 927.0% in earnings (-$6.47 versus -$0.63).

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