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Sunedison Inc (SUNE) Is Misunderstood by Mr. Market; Are Hedge Funds Right to Be Bullish?

Sunedison Inc (NYSE:SUNE)‘s stock lost around 13% on Friday, on the highest trading volume on the market of roughly 88.87 million shares, which is more than five times higher than the average volume. The decline came after the company reported its financial results on Friday. Sunedison posted revenue of $455 million for the second quarter of 2015, up from $431 million a year earlier, but its net loss expanded to $0.89 per share from $0.16 delivered a year earlier. Right after the company disclosed the results on Thursday, the stock plunged by 25% in after-market trading. Therefore, it seems like the majority of investors focused on the decline in EPS, which is not always a good metric for evaluating a stock. According to some reports, the drop left the analysts surprised, the majority of whom holding bullish outlooks on the stock and appreciating Sunedison Inc (NYSE:SUNE)’s investment efforts to expand into new markets. This year the company made several acquisitions, the last one being Vivint Solar, which it agreed to buy in July for $2.2 billion.

SunEdison SUNE Solar Panels

However, one group that is the most surprised and at the same time displeased with the performance of Sunedison’s stock are long investors, and more specifically, hedge funds. From our database of more than 700 funds, a total of 94 investors held around $4.44 billion worth of Sunedison Inc (NYSE:SUNE)’s shares, which represented around 68% of the company at the end of March. This shows that hedge funds were bullish on the stock at the end of Q1, and the past data also show that the stock has been among their favorites for a long time. One of the investors that is the most disappointed is David Einhorn of Greenlight Capital, who has been pitching Sunedison for years and in his letter to shareholders for the second quarter, said that Sunedison was the “only significant winner”.

Greenlight initiated a stake in Sunedison during the first quarter of 2014 and had been saying that the market misunderstood the company and that it was worth around $32 – $34 per share. Sunedison has made some progress since then in the form of acquisitions, expansions and the IPO of Terraform Power. In this way, the company might be worth much more than the market is valuing it at the moment.

David Einhorn
David Einhorn
Greenlight Capital

At the end of March, Greenlight held a $600 million position in Sunedison Inc (NYSE:SUNE) and has not yet disclosed its 13F for the second quarter. The stock was also one of the favorites among billionaire investors, nine of whom reported holding in aggregate $1.43 billion worth of stock at the end of the first quarter (including Einhorn). However, if we take into account that the majority of smart money invests for the long-term and given the analysts’ bullish sentiment of the stock, the case might be that the decline might attract more capital from investors.  In a couple of weeks we will analyze the data from the current round of 13F filings and will be able to assess the changes in the hedge fund sentiment for Sunedison. So far, one of the funds we track, Donald Chiboucis’ Columbus Circle Investors disclosed raising its stake in Sunedison by 605,100 shares to 1.13 million shares during the second quarter.

We consider that following the hedge fund sentiment in a stock is an important metric that can be used to assess the profitability of an investment. We determined that 15 most-popular small-cap stocks among hedge funds can outperform the market by almost one percentage point per month, while their favorite large-cap ideas lagged the market by a small margin. Our portfolio of these 15 stocks managed to return around 123% in the last 35 months, beating Mr. Market by more than 60 percentage points (read more details here). This shows that even though hedge funds’ 13F and other filings come with a delay to the real time of events, they can still be used to get some interesting insights.

With this in mind, it looks like analysts are right and the majority of investors still misunderstands the company. The decline from the last couple of days will definitely affect the returns of the bullish hedge funds, but most likely if they stick to their positions for a while longer or even choose to buy more shares on the dip, they will be rewarded over the long-term.

Disclosure: none

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