The stock market isn’t rational all the time. Mr. Market thought many internet stocks were worth their weight in gold in 1999. Then it thought they weren’t worth their weight in toilet paper a year later. The market did the same with Sunedison Inc (NYSE:SUNE) several years ago. It valued Sunedison as high as $90 a share in 2007 and as low as $1.75 a share in 2012.
Now the market is at it again. Sunedison Inc (NYSE:SUNE) shares traded for as high as $33 a share this year and as low as $6.56 per share. The stock surged by almost 12% on Monday, but it is still 52% below what it was at the beginning of the year.
There are a couple big differences between 2012 and 2015. Solar demand is substantially higher than 2012. Experts estimate that there will be around 55-57 GW of demand for solar this year. That’s 74% higher than in 2012. The increased demand means that Sunedison will always have business if it is efficient.
The number of hedge fund fans of Sunedison is also considerably greater. The list of hedge funds long Sunedison Inc (NYSE:SUNE) reads off like the who’s who of the hedge fund industry. In first place is David Einhorn‘s Greenlight Capital, which owned 24.8 million shares of the solar company at the end of June. Sunedison is Einhorn’s second largest equity position after Apple. In second place is Dan Loeb’s Third Point, which held 12.4 million shares at the end of the second quarter, making the solar company Loeb’s sixth largest equity position. In third place is Larry Robbins’s Glenview Capital, which owned 11.4 million shares. Overall, 93 out of over 730 elite funds that we track owned a stunning $5.68 billion worth of the company’s stock (representing 69.10% of the float) at the end of June, up from $4.44 billion a quarter earlier. The substantial elite fund concentration makes Sunedison the smart money’s favorite renewable energy security.
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 118% since then and outperformed the S&P 500 Index by around 60 percentage points (see more details here).
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Recently famous short seller John Hempton threw his hat in the bullish ring, disclosing that he too was long (see details). In his blog article ‘Sun Edison – some comments and a way forward’, Hempton acknowledges that there are a lot of self fulfilling prophecies in the market. If enough investors believe something is going to happen, it could happen. That’s why there is FDIC insurance, because if enough people believe a regional bank has a liquidity crisis, it will have a liquidity crisis. Given the steep decline in Sunedison shares, many investors are worried about Sunedison’s liquidity. The acquisition of Vivint will cost Sunedison and its captive yieldco around a billion dollars in cash. That’s concerning for investors because Sunedison operating activities are cash flow negative. From Hempton’s research, however, he doesn’t think Sunedison will go bankrupt because of lack of liquidity, although he can’t be 100% sure because he can’t see all of Sunedison’s data. But from everything that he can see, Hempton thinks Sunedison is a reasonably good security to go long.
Sunedison’s liquidity profile is improving. It recently raised $1 billion from a warehouse facility and could raise more in the future. What would really help would be for Sunedison to call off the Vivint acquistion that is expected to close in the fourth quarter.
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