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Bank on Another Double-Digit Rally in This Sector in the Next 3 Months

In April, I wrote about the better-than-expected full-year forecast from alternative energy company First Solar (NASDAQ: FSLR). The stock had just spiked some 45% on the news, and the trading volume was so furious that it actually triggered a Nasdaq circuit breaker that caused a brief halt in the stock's trading.

The surge on April 9 was followed with a 15%-plus run in the shares through today, but this could be just the beginning of the gains to come for stocks in the solar universe. According to new industry research, the metrics in solar are just starting to look extremely good for companies in the space.

In the latest report from solar industry research firm IHS, the group's IHS Solar Integrated PV Market Tracker reports that the first quarter of 2013 saw the end of more than two years of sharp declines in pricing for solar photovoltaic modules. The report also said that PV modules have achieved price stability, and that this will now pave the way for an increase in industry gross margins and a return to profitability for some leading suppliers this year.

IHS reports that after falling throughout 2012, global gross margins for PV modules rose to 1% in the first quarter of 2013, which was up from zero in the fourth quarter of 2012. The report also predicts gross margins for the industry will be supported by rising prices, and could rise to 6% by the end of the year.

Here's the money quote from Stefan de Haan, principal PV analyst with IHS: "The long-suffering solar module market has clearly turned around, with the industry finally on a growth path, not only in terms of output but also for revenue and earnings."

For stocks in the space, the IHS thesis represents another positive data point that traders should take advantage of today, and here are two ways to do just that.

First off, if you're looking for an industry-wide way of playing the improved metrics in solar, turn to Guggenheim Solar (NYSE: TAN).

This solar ETF is pegged to an index comprised of 22 companies in various parts of the industry. TAN's top 10 holdings make up about 70% of its total assets, and those top holdings include China-based GCL-Poly Energy Holdings Limited, SunEdison (NYSE: SUNE), SunPower (NASDAQ: SPWR), Trina Solar (NYSE: TSL), and of course, First Solar.

Solar ETF TAN Chart

Recommended Trade Setup:

-- Buy TAN at the market price
-- Set stop-loss at $23.49, approximately 8% below the current price
-- Set initial price target at $28.41 for a potential $12% gain in three months

For those who want to skip the diversification a solar ETF provides and go straight for the shiniest company, then a great way to do so is with First Solar stock. Certainly, this isn't the only solar company with the potential for big upside, but it is one of the most heavily traded. It's also a stock that serves as a bellwether for the industry.

FSLR Stock Chart

Technically speaking, FSLR looks extremely attractive at current levels. The shares have seen a pullback since early June, a move consistent with the overall selling bias in the general market during the same period.

Lately, the price has stabilized around the $45 level, and I suspect that the next big move for FSLR will be to the upside.

Recommended Trade Setup:

-- Buy FSLR at the market price
-- Set stop-loss at $42.10, approximately 8% below the current price
-- Set initial price target at $51.26 for a potential 11% gain in three months