Why You Should Go Against the Flow in This Solar Stock

Sunedison Inc (NYSE:SUNE) used to be one of the favorites, if not the favorite, renewable energy stock on the Street till a few weeks ago. However, a more than 60% collapse the stock went through since July has unnerved even the most bullish investors who own the stock. Although several people blame the second quarter earnings miss by the company as the reason for the decline in the stock, it must be pointed out that the stock had already lost more than 30% in the 15 days preceding its second quarter earnings release. The actual reason as to why the stock has suffered such drastic fall in the past couple of are manifold, with the earnings miss being just one of them.

SunEdison SUNE Solar Panels

 Liquidity And Earnings

Perhaps the biggest reason among all is the liquidity concerns being faced by the company. As anyone who tracks Sunedison Inc (NYSE:SUNE) will know, the company in the past couple of years was engaged in a massive expansion spree, which saw it forming two YieldCo’s, namely TerraForm Power (NASDAQ:TERP) and TerraForm Global (NASDAQ:GLBL), and quite recently acquiring Vivint Solar Inc (NYSE:VSLR) in a $2.2 billion deal. For expanding at such a massive pace, the company needed to raise debt, which it was able to do quite easily with interest rates being low and investors having confidence that these moves would pay off in the future. Though the quarterly numbers Sunedison Inc (NYSE:SUNE) reported during this period of massive expansion in 2013 and 2014 were generally below expectations, investors still held on to their conviction regarding the company. However, in July when the company announced that it would be acquiring Vivint Solar Inc (NYSE:VSLR), the talks regarding liquidity issues faced by Sunedison started gaining more and more traction and its shares started declining. To add fuel to the fire, on August 6 the company reported a net loss $0.93 per share for the second quarter, while analysts were expecting a loss of $0.55. This earnings miss created a sort of panic in the market.

Nevertheless, out of over 700 funds tracked by Insider Monkey, 93 reported owning a stake in the company as of the end of the second quarter. Taking into account that the aggregate value of holdings stood at over $5.67 billion as of June 30, hedge funds that we cover owned more than half of the company at that time. Kenneth Tropin‘s Graham Capital Management was the largest shareholder of the company among funds we cover at the end of June, owning 29 million shares, followed by David Einhorn‘s Greenlight Capital and James Dinan‘s York Capital Management, which held over 24.84 million and 15.075 million shares, respectively. Recently,

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 117.6% since then and outperformed the S&P 500 Index by over 60 percentage points (see more details here).

As previously discussed, hedge funds held around a half of SunEdison at the end of June and even after such a significant slump in the stock, there haven’t been any signs that they are selling their stock in droves. On the contrary, recent regulatory filings have shown that some of them are buying more shares. Steve Cohen‘s Point72 Asset Management has disclosed in a recent 13G filing that it increased its stake in the company by more than 600% to 15.95 million shares.

Apart from the reasons discussed above, there are two other motives that bears cite to argue that Sunedison’s stock will continue its downward journey. One of them is that the slump in oil prices is negatively impacting and will continue to impact the demand for renewable energy and the other is that Sunedison’s expansion to other countries has rendered it vulnerable to currency headwinds. Although both these reasons and the ones previously mentioned hold true to an extent, we believe they are already priced into Sunedison’s stock. With the 60% correction that the stock has had in the past couple of weeks, when nothing major has fundamentally changed on the ground for the company during that period, one can argue that several market participants overreacted and sent the stock tumbling down.

With so many hedge funds, especially the ones run billionaire investors, betting on the stock, it will be foolhardy to think that they didn’t do their due diligence before committing so much money to the stock. Keeping this in mind and the fact that the stock has reached an attractive valuation after the recent plunge, Sunedison is a perfect stock for investors who don’t subscribe to the herd instinct.

Disclosure: None