With the NASDAQ index still in the red and the S&P up by just four-tenths of a percentage point, shares of Sunedison Inc (NYSE:SUNE), TerraForm Power Inc (NASDAQ:TERP), Vivint Solar Inc (NYSE:VSLR), Vera Bradley, Inc. (NASDAQ:VRA), and Yahoo! Inc. (NASDAQ:YHOO) are surging in late-morning trading. Let’s take a closer look at what has propelled these stocks higher this morning. We’ll also take the opportunity to examine relevant hedge fund sentiment toward the stocks.
Why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 38-month period beginning from September 2012, returning 102% (see the details here).
First up is beleaguered renewable energy developer Sunedison Inc (NYSE:SUNE), whose shares are up by 22% today on the news that it has amended its Vivint Solar Inc (NYSE:VSLR) acquisition with Blackstone. Under the terms of the new deal, SunEdison will pay $2.00 less in cash and $0.75 more in stock. For Vivint shareholders, the new deal works out to $7.89 per share in cash, 0.12 Sunedison Inc (NYSE:SUNE) shares, $3.30 per share in convertible notes, and the additional $0.75 per share in stock considerations. In addition, Vivint Solar Inc (NYSE:VSLR) shareholders have the option of just receiving cash instead. If that occurs, Blackstone will own the shares and convertible notes as payment. Given the all-cash option, it’s not surprising that Vivint shares have surged by 17% today as well and given that Blackstone is willing to be a major holder of SunEdison, the news means that SunEdison now has a major institution with billions of dollars that believes in it. Although the news doesn’t solve SunEdison’s liquidity problems, it certainly lessens the fear of them.
Not surprisingly, SunEdison’s captive yieldco, TerraForm Power Inc (NASDAQ:TERP), is also up large on the news, by 27%. Under the terms of the new deal between SunEdison and Vivint, TerraForm Power will pay $799 million for some of Vivint Solar’s assets, down from the previous $922 million. TerraForm Power Inc (NASDAQ:TERP) also has the option to reduce its cash payment obligation by around $236 million, to $563 million. Among today’s winners is David Tepper’s Appaloosa Management, which owns 7.6 million class A shares of TerraForm Power Inc (NASDAQ:TERP). Tepper has criticized SunEdison’s Vivint acquisition as destructive to TerraForm Power’s holdings.
Of the smart money investors that we track, 73 of them owned SunEdison on September 30, while 14 were long Vivint Solar, and 31 were bullish on TerraForm Power.
On the next page, we examine why Vera Bradley and Yahoo are surging today as well.