Between Tuesday’s 24% gain and today’s 44% advance, it’s not tough to start thinking SunEdison Inc (NYSE:SUNE) shares are on the mend. Monday’s bankruptcy bombshell hit the stock exceedingly hard (SUNE stock lost more than 50% of its value that day), but in the shadow of the 99% selloff from last July’s high, that worst-case scenario was arguably already priced in — and then some.
Now the pendulum is swinging the other way after the overzealous bears pushed SunEdison shares too low.
There’s just one problem with that kind of thinking. It’s flat-out wrong. Hopes that there’s any salvageable value left in SunEdison shares is wishful thinking at best.
Here’s how SUNE stock should be viewed, and traded, from this point forward.
SunEdison Isn’t the Company You Think It Is
Our condolences to anyone who rode SunEdison all the way into its grave thinking sooner or later things would get better. They didn’t, and they’re not going to.
While the company has yet to officially submit its chapter 11 bankruptcy paperwork, it’s unlikely there’s any other plausible outcome. Once that happens, SUNE stock will be pretty much worthless. The bonds will only be worth slightly more.
That’s not necessarily the case with all bankruptcies of publicly traded companies. Usually, creditors (lenders) are given something of value, then actual bondholders might get a small piece of whatever’s left. After that, shareholders might, might get a token pittance of whatever a bankruptcy court can justify scraping together off the floor.
Most of the time, though, shareholders get nothing out of a bankruptcy, since they have no superseding legal claim to lenders and bond owners.
SunEdison is deep into that “there’s going to be nothing left for stockholders” territory.
It’s just a simple matter of math.
As of the latest look, SunEdison has $9.8 billion worth of long-term debt on the books, plus another $5.1 billion in current liabilities. There’s also another $1.4 billion in capital lease obligations, although that’s likely irrelevant at this point. The debt and current liabilities alone, however, amount to $14.9 billion worth of legal obligations. Those people are going to want their money.
Investors who know the SunEdison balance sheet well will be quick to point out the company’s got $4.2 billion worth of liquid or near-liquid assets on the books, plus $11.9 billion worth of property and equipment. That, technically speaking, could be sold to cover all existing debt and still leave a little something for shareholders.
But that’s not a realistic expectation.
Yes, the math makes sense. What doesn’t make sense is the likelihood of SUNE being able to sell its $11.9 billion worth of property and equipment anywhere near its stated price on the books. Needham & Co. analyst Edwin Mok recently opined those assets would do well to be “sold for pennies” on the dollar of their accounting valued, mainly because they’re largely unfinished.
Never even mind the likelihood that the most recent balance sheet posted by the company — from way back in September — may have overstated the company’s available cash. The matter is currently under investigation by the SEC.
And of course, nobody really knows the true current financial picture for SunEdison. The last balance sheet we have (accurate or not) is now six months old, and we know the company’s been booking significant losses. That didn’t likely change in the meantime.
Legal expenses are also going to chip away at SunEdison’s cash balance, whatever it is, in the meantime.
That’s the long way of saying there won’t be anything left for stockholders.
So why then, pray tell, has SUNE stock managed to gain 80% in the past two days in the shadow of a bankruptcy threat?
It’s simple: short-covering. All those people who wisely bet against SUNE stock at any point in the past nine months — by selling it — are now closing out those short trades by buying the stock back. That buying is driving the price higher. With few investors willing to buy it now, those traders have to be willing to take an exit price quite a bit above Monday’s closing price.
Make no mistake, though. Those short positions are still being exited at a big profit. Even with Tuesday’s and Wednesday’s gains, SUNE stock is still trading below Friday’s close — before the bankruptcy news began to circulate.
Bottom Line for SUNE Stock
None of this is to say SUNE can’t or won’t at some point in the foreseeable future move higher. It just might.
It is to say, however, that SunEdison doesn’t have the right stuff to remain at higher prices for any length of time if it manages to make any further gains. SUNE is nothing more than a trade, and a speculative one at that, mostly betting on more short-covering trades pushing the price upward.
But even that’s a risky bet.
While some of those short positions are still being unwound the bulk of the first wave of that buying has likely been completed. From here — with SUNE stock very plausibly headed to zero — most traders can and will wait until the bankruptcy reorganization goes into effect. This will effectively “sell” the stock at a price of zero without the need of fighting for a decent exit price.
It’s just going to take a while for that to happen; bankruptcies can take months to process.
In other words, there’s no plausible reason to expect any sort of corporate turnaround from SunEdison, nor is there a reason to buy into SUNE on hopes of such.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
