John Hempton’s Bronte Capital is long Sunedison Inc (NYSE:SUNE). Hempton is a famous short seller, so when he goes long on a stock, it gets people’s attention. Hempton is also a bit of a contrarian. He went long Herbalife Ltd (NYSE:HLF) in 2013, after Bill Ackman shorted it and the investing public sold the stock. By going long SunEdison, Hempton is once again going against the crowd. SunEdison shares are down 63% year-to-date and off 78% from their peak this year as investors fret over the company’s liquidity. Let’s take a closer look at Hempton’s thesis.
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In his blog entry on the solar firm, Hempton acknowledged that Sunedison Inc (NYSE:SUNE) is a ‘trust me’ stock, as the company’s balance sheet has many related parties ‘and the copious amounts of different types of debt these companies have [are] complex and even scary accounts’.
Given his accounting background, however, Hempton is uniquely suited for ‘getting to the bottom of complex accounts’ and properly evaluating the fair value of the obscure securities.
Hempton thinks Sunedison’s existing projects are worth a lot. He also thinks that the Sunedison has enormous value if it repairs its relationship with the capital markets.
“Any solar farm deal you put in place 3-5 years ago has worked out. Both solar panel prices and interest rates are lower than you would have baked into your cash flow models. We would be enormously surprised if the past deals of Sun Edison did not work out. Whether the future deals work out is however an open question. Low solar panel prices and low interest rates are not exactly a secret – and the funding cost for solar panel farms has risen with this panic. Bluntly we think unless the company repairs its relationship with capital markets it is unlikely to be able to generate good deals in the future and it will wind up in run-off.”
When it comes to the market’s concern over Sunedison’s liquidity, Hempton thinks investors are being irrational. Based on the information gathered from industry experts, Hempton reaches the conclusion that:
“Specifically all construction finance automatically can be termed out as project finance (over the life of the project and linked to the project) when the construction is done. If this is true the market fear for this company cannot cause insolvency. Given that the company is priced as if insolvency is likely this stock should produce a good return from here.”
Although Hempton can’t see all of Sunedison’s funding and thus can’t be completely sure that Sunedison won’t go bankrupt, he has seen a great deal and thinks the stock is a good bet.
“Now of course we have not seen and understood all of the finance deals. Only the ones we can find. But that is sufficient to know we are probably right. And that is the case for buying. The old projects are good and they should run off at an attractive clip.”