Shares of SunEdison Inc (SUNE) stock are soaring on Friday, shooting up more than 10% in mid-day trading. The rally comes as SunEdison and TerraForm Power (TERP) reached a settlement with Latin America Power shareholders, resulting in the dismissal of a lawsuit. SunEdison agreed to shell out $28.5 million to dismiss the claims.
There are several other factors likely at play in SUNE stock’s rally today. Oil prices jumped 3.5% Friday, making renewable energy investments more attractive. Also, SunEdison stock got creamed Thursday, shedding 14%, so on an up day like Friday, a simple rebound could very likely be in play.
On top of all that, SUNE stock is heavily shorted. That means that when shares rise, they’re more likely to actually explode higher than simply drift upward. That’s because some percentage of short-sellers will begin to exit, or “cover,” their short positions, buying the stock and causing what’s referred to as a “short squeeze.”
At last check, there were nearly 100 million shares of SUNE stock sold short: 98,680,091 shares to be exact. That’s about 31% of the total float; 31.13523% to be exact.
Point being, there are ample reasons that SunEdison stock is roaring higher today. But does that mean it’s a good idea to buy SUNE? The answer is an emphatic “no.”
SunEdison Stock: Do NOT Approach
These one-day returns sound remarkable, don’t they? Well, if something’s too good to be true, odds are it is; and indeed, SUNE isn’t some remarkable stock trading on the cheap that’s poised to post big gains like this over and over again. Friday is the exception, not the rule.
That much should be abundantly clear from the 92% losses SUNE stock has suffered over the last year, even after Friday’s rally. The company is dealing with rather severe liquidity issues brought on by poor industry economics and an acquisition-happy philosophy. The price of oil has been plunging for nearly two years, making renewable energy solutions less appealing with each downward tick.
It’s gotten to the point where SUNE is hemorrhaging cash, and looking for every possible way to cut costs and raise capital. Its levered free cash flow is -$3.3 billion, its operating cash flow is -$1.39 billion, and its long-term debt-to-equity ratio is around 7-to-1.
SUNE is reducing headcount by 15% to cut costs, and has even taken to selling assets to raise cash. Despite its desperate situation, SUNE is proceeding with its attempted acquisition of Vivint Solar (VSLR) for $1.9 billion in cash and stock.
But new developments this week hint that it’s ever-more likely the already-controversial Vivint deal may never see the light of day. Earlier this week, SunEdison said that it would have to delay its 2015 earnings report by as much as 15 days. The Wall Street Journal cites the bleak reason behind this, saying the report will be delayed:
“…while its board investigates claims from both a former and a current employee challenging the accuracy of the company’s financial disclosures.”
It’s never a good thing to A) have allegations of financial misconduct, or B) be forced to delay an earnings report. The combination of these two factors is an overwhelmingly bearish indicator for SUNE stock, even at these beaten-down levels.
Last year, when Plug Power (PLUG) delayed its earnings release, I out-and-out stated it was bad news, citing an academic study that found delayed earnings announcements usually result in that company missing on earnings estimates. Sure enough, when Plug Power’s earnings came out they were below consensus, and the stock plunged 10%.
So what does all this have to do with SUNE’s proposed VSLR acquisition? Well, the major banks that were going to loan SunEdison the cash it needed for the deal are now reconsidering after these recent shenanigans. By delaying its earnings release, SUNE violated a condition of the loan agreement, according to the WSJ.
Put simply, those are some Revenant-level bearish indicators. With all the very real concerns surrounding SunEdison and its books, I wouldn’t buy SUNE stock even if the rest of Wall Street seems to like it today.
Think for yourself. And stay away from bears. Ask DiCaprio.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
