Is it Time to Bail on SUNE Stock?
After making new all-time lows, SunEdison Inc (NYSE:SUNE) stock has nearly doubled its value in a day. SunEdison may have beaten David Tepper, but a number of headwinds remain for SUNE stock.
The price volatility in SunEdison stock has made it a darling of Wall Street traders. One day, the stock tanks 30%, the next day, it shoots up 40%.
For the average Joe, it’s a lucrative trade. He looks at the price chart and sees that the stock was trading at more than $30.00 only a few months ago. Now, it’s down to two bucks. His investment prowess is limited. He believes that after every fall must come a rise. So he decides to try his luck. Besides, the stock is worth only two bucks; how badly can it hurt?
That investment psyche could make you a millionaire overnight. But it could also make you go bankrupt. If you don’t look at the underlying fundamentals, you’re just gambling.
There’s no questioning the fact that SunEdison is one of the biggest solar companies in the world. It is leading the green revolution that took off in the west and is now taking the whole world by storm. The company owns a massive installation capacity and boasts more than a two-decade-long track record in this business.
Everything was working fine until the company took some missteps.
The most noteworthy of these was the creation of its two yieldcos—TerraForm Power Inc (NASDAQ:TERP) and TerraForm Global Inc (NASDAQ:GLBL).
Allow me to explain why…
Watch Out for These Signs in SUNE Stock!
SunEdison’s yieldcos, although separately traded, are not really independent of their parent. These yieldcos are being used to make acquisitions or finance debt-backed projects. In fact, SunEdison has even used its yieldcos to acquire syndicated loans.
The problem with this model is that it obscures the relationship between the parent and the yieldcos.
The result? Lawsuits!
In case you haven’t been following, David Tepper, who owns a stake in SunEdison’s TerraForm yieldco, wanted to stop SunEdison from forcing TerraForm to acquire Vivint Solar Inc (NYSE:VSLR).
Confused? You’re not alone.
Notice that all three of these companies are publicly traded separate legal entities. However, SunEdison’s complex relationship and strong influence over TerraForm has put TerraForm shareholders in jeopardy.
In fact, SunEdison’s debt-backed acquisition binge has put its own shareholders in trouble. (Source: “BTG Pactual, Brazil’s Patria to sue SunEdison on deal –Valor,” Reuters, February 25, 2016.)
The company acquires assets through debt, and then sells those assets to its yieldcos. Then it uses the proceeds to acquire some more assets or pay off some of the debt. The cycle continues. (Source: “As SunEdison Struggles, It Sheds Its Japanese Solar Arm,” Fortune, February 1, 2016.)
David Tepper may have lost the battle against SunEdison. But bear in mind that Appaloosa’s lawsuit was not the first and likely not the last of the lawsuits the company is battling. (Source: “SunEdison Cuts Factories, Jobs in Attempt to Stay Afloat,” Fortune, February 18, 2016.)
The Bottom Line on SUNE Stock
Debt-backed acquisitions have pummeled the stock, pushing it down to dangerous levels. But I’m welcoming management’s move to avoid more acquisitions until the company can stand back on its feet. (Source: “SunEdison plans to offload equity in 500 MW Andhra Pradesh project,” The Economic Times, February 26, 2016.)
At the same time, however, SunEdison needs to restructure its debt and limit its complex intercompany transactions with its yieldcos.
The company holds a strong portfolio of assets across the globe and must use it to grow from within. Management must stop looking for more unprofitable acquisitions to expand its foothold.
Investors must look for signs of improvement instead of falling in with the herd. From where I see it, this is the only real problem facing the company. If this gets fixed, SUNE stock could easily rally back to its 2015 highs.