It’s a little too soon to guess as to whether Monday’s intraday rebound effort means the market has hit the trade-worthy bottom, or if it just means the bears are taking a breather.
But for SunEdison (SUNE), it may not matter. Down a whopping 64% since mid-July, but up 25% from its lows today — and up 9% from Friday’s closing price — SUNE stock looks ripe for a rally.
To what degree a bounce takes hold, or it it even has one, remains to be seen. Sometimes, though, you just have to take a shot based on the risk vs. reward proposition. This happens to be one of those times.
The Rise and Fall of SunEdison
SunEdison makes and sells solar panel systems. Though rarely profitable (and not even modestly profitable since 2010), the market has always respected the company’s potential.
As evidence to that end, SUNE stock rallied out of a funk that that sapped most solar panel stocks all the way through 2012, moving from a price of near $1.50 per share in the middle of that year to a peak of $33.45 just a month ago.
The day the firm announced a company-altering acquisition, however, was the same day SUNE stock hit a major roadblock and began a 64% pullback. It wasn’t a coincidence.
The acquisition was Vivint Solar (VSLR): SunEdison offered to buy the company from VSLR shareholders for $9.89 in cash plus another $6.60 worth of SUNE stock. That total offer of $16.50 per share translated into an immediate 45% gain for Vivint shareholders, and was a 52% premium to the previous day’s close for VSLR.
From a strategic standpoint, the Vivint Solar deal makes reasonable sense for SunEdison. SUNE wanted more exposure to the residential solar panel market, which Vivint had in spades.
From an investor’s point of view, however, a cash-burning SunEdison may have not only overpaid for VSLR, but it also may have setup what would become a rather significant dilution of the current float for SUNE stock. All told, SUNE will be issuing about $370 million worth of SunEdison shares by the time the deal is done, which is more than twice what it would have been a month ago before SUNE dropped the bulk of its value.
This isn’t to say the acquisition of Vivint explains the entire 64% plunge from SUNE stock. But, it may have been the catalyst for the bulk of it at a time when SUNE shares were particularly vulnerable to external, as well as internal, headwinds.
SUNE Stock Has Dropped the Right Hints
Be that as it may, the market may have fully priced the deal with Vivint into SUNE, and then some. Those same traders are now acting like they recognize their overzealous mistake, and stand ready to correct it.
The biggest bullish clue is just the shape of today’s chart. It’s called a bullish engulfing day, characterized by an open below the prior day’s low, and a close today above the prior day’s high. This one isn’t perfect, in the sense that today’s close may or may not remain above Friday’s high. The underpinnings of a reversal effort, however, are still evident.
The other bullish clue is the volume trend.
It’s a subtle nuance, but though SUNE was getting hit rather hard last week, the volume didn’t match the degree of selling. The bulk of the bearish volume played out in early August, with the selling climax most likely materializing on Aug. 7th. That’s not to say last week’s bearish volume was especially light, but given the context and new lows, we can reasonably assume there’s not a great number of would-be sellers left waiting in the wings.
Bottom Line
Calling a spade a spade, this isn’t a contrarian trading idea without its risks. The market is clearly ticked off at SunEdison, for one reason or another. Though it appears the worst is over and the bears have finally run out of steam, there’s no outright assurance SUNE stock has hit its bottom.
On the other hand, between the waning selling volume, today’s reversal clues (from SUNE, as well as the broad market) on top of the fact that SunEdison shares look just about as beaten down as they could be, it’s a compelling risk vs. reward scenario.
Few traders can say they haven’t taken on far crazier trades.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
