Why SUNE Stock Is Trading at Bargain Basement Prices
It’s been a traumatic year for SunEdison Inc (NYSE:SUNE), one that tested the faith of even the most bullish investors. Diehard fans of SUNE stock were stunned into silence as the company lost more than 90% of its value in less than six months.
Talk about a bloodbath. There were days that I was relieved to see a three-percent decline on SunEdison stock, because it was only three percent. It had become commonplace to see the share price slip by more than 10%, reflecting the deep lack of faith investors had in the stock.
How was this possible? How was it possible for a company that had been universally admired for its organizational structure just a few years ago to fall so quickly?
The answer has something to do with management’s heavy-handed decisions to control its yieldcos subsidiaries—and even more to do with its expansive debt load. However, the biggest reasons for SUNE stock’s decline are through no fault of the company itself.
Let’s take a closer look.
Examining the Anchors
One of the heaviest weights on SUNE stock is the current slump in crude oil prices. The collision of long-term trends in the energy market, from the shale boom in the U.S. to a re-emergence of Libyan production, created an excess of supply.
In North America, the technology for fracking was reducing dependence on foreign oil, so there was no need to pare back production. Libya was only just pulling itself out of a civil war, yet there was so much chaos on the ground that we didn’t know how much oil would actually get added to world supply.
In a nutshell, it was too much. Since then, both West Texas Intermediate (WTI) and Brent crude have fallen from above $100.00 a barrel to below $30.00. In fact, they’re both hovering around $28.00 right now, because Iran is about to add its supply to the mix.
No one is scaling back production. One would assume the invisible hand of the market would make an appearance at this point, driving down supply to rebalance the price of oil, but it simply hasn’t happened.
We’re not really sure why everyone is willing to sit on the sidelines. There are theories, but that speculation is the subject of a different article. Right now, the material point about low oil prices is that they decimate renewable energy stocks, in particular residential solar stocks.
But that logic makes no sense. Although crude oil and solar power are both part of the energy sector, they are rarely in competition. Crude oil is used to make gasoline or other petroleum-based products, whereas rooftop solar is for household electricity.
Why would investors go short on SUNE stock if oil is dropping? The logic makes no sense, which experienced investors should recognize as an irrational market sell-off.
Secondly, there was a regulatory shift in Nevada that drove SolarCity Corp (NASDAQ:SCTY) out of the state, spooking investors on the entire industry.
Rooftop solar users can feed their excess energy back onto the grid in exchange for cash. This process, known as “net metering,” helps make solar panels affordable to the average user. Nevada lowered the amount they would pay for net metering, as well as hiking other fees on solar power users. SolarCity boycotted the decision by leaving the state.
SunEdison Stock Forecast 2016
So to recap, SUNE stock was depressed this week on fears of the Nevada regulatory changes and even lower oil prices. The $28.00 level hasn’t been seen for more than a dozen years, prompting more of the warped logic I described above.
And as for the Nevada ruling, SunEdison Inc has a large setup in the state, meaning the ruling doesn’t really affect the company. Investors are simply running scared with little thought as to why, which gives me hope that SUNE stock could rise when the market returns to sanity.