Appaloosa Management Sends Letter To TerraForm Power & Three Other Notable Hedge Fund Moves

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In four separate filings, David Tepper’s Appaloosa ManagementAndrew Feldstein and Stephen Siderow’s Blue Mountain Capital, Brad Gerstner’s Altimeter Capital Management, and Julian Robertson’s Tiger Management disclosed their latest moves involving TerraForm Power Inc (NASDAQ:TERP), Pure Storage Inc (NYSE:PSTG), and Enzymotec Ltd (NASDAQ:ENZY), respectively. Let’s take a closer look at the four transactions.

We believe that paying attention to hedge funds’ moves is important. Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. a 48.7% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying.

TerraForm Power Inc (NASDAQ:TERP) is engaged in owning and managing solar-energy projects, having a market cap of $1.10 billion. Blue Mountain Capital has increased its position in the company to 9.17 million Class A shares, up from 8.08 million shares held previously. The stake represents 11.5% of the company’s stock. In its latest filing, Blue Mountain has stated that it acquired more shares Class A shares of the company for investment purposes. Shares of TerraForm Power have declined by 74.48% year-to-date. For the third quarter, TerraForm Power Inc (NASDAQ:TERP) reported a net income of $2.42 million compared to a loss of $1.87 million in a year-ago quarter. Operating revenues rose to $163.3 million compared to $53.6 million in the same period of 2014. Another investor that values TerraForm Power is Christian Leone’s Luxor Capital Group, with ownership of 4.66 million shares as of at the end of September.

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In a separate filing, Appaloosa Management disclosed a letter it sent to TerraForm Power, stating that the company needs to keep Sunedison Inc (NYSE:SUNE) at arm’s length. According to the filing, Appaloosa Management holds 7.60 million Class A shares, equal to 9.50% of the company’s stock. This compares to 7.40 million shares the investor reported previously.

TerraForm Power is a yieldco formed by SunEdison. SunEdison signed an agreement to acquire Vivint Solar for $2.2 billion, and TerraForm Power, as a part of the deal, will buy the residential solar rooftop portfolio of Vivint for $922 million. The investor views the proposed Vivint transaction as a breach of proper governance procedures and principles. Further, Appaloosa noted that TerraForm Power can regain its balance only with independent leadership that is determined to honor the company’s mandate to “acquire, operate and own renewable energy generation assets serving utility and commercial customers that generate high-quality contracted cash flows.”

Appaloosa Management said that the Vivint Solar deal marked an unfortunate departure from TerraForm Power’s business model. The deal appears to serve the sole purpose of promoting SunEdison’s desire to acquire Vivint’s development and operating assets, rather than enhancing the quality and value of TerraForm Power’s holdings, according to the letter. Moreover, Appaloosa Management stated that the transaction poses a serious threat to TerraForm Power’s prospects and should be vigorously resisted by the company, as the unaffiliated shareholders’ advocate.

On the next page, we’ll talk about the latest moves of Altimeter Capital Management and Tiger Management.

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