In what’s been a blistering year for solar equity gains, Sunworks (NASDAQ:SUNW) stock is participating in that trend. Sunworks is higher for the year by a jaw-dropping 251%.
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On the surface, that’s an undoubtedly impressive performance – one that compares favorably with the 166% returned by the Invesco Solar ETF (NYSEARCA:TAN). Of course it helps that SUNW is a micro-cap name ($89 million market capitalization) and that it was the subject of a failed acquisition bid by Peck Company Holdings (NASDAQ:PECK).
As recently as late September, Sunworks was no more than a speculative penny stock, scuffling as more credible solar names soared amid the renewable energy boom. Alone, Sunworks’ status as previous laggard in a scorching hot sector is cause for concern.
But wait, there’s more. And the “more” explains why SUNW stock is an idea for risk takers, not prudent investors.
SUNW Stock Deals With Takeover Drama
As noted above, the primary catalyst for the 2020 Sunworks surge was the acquisition proposed by Vermont-based Peck.
“Was” being the operative word because when it came time for Sunworks investors to vote on the $14.1 million deal last month, just 26% approved voting on the transaction and that wasn’t nearly enough for the matter to be officially voted on.
“We are disappointed that the proposed merger with the Peck Company failed to gain approval from our stockholders. We believed that this merger would have been the best long-term option for Sunworks and would have provided the best outcome for stockholders,” said Sunworks Chairman Chuck Cargile in a statement.
Cargile adds that the company will continuing talking with Peck to find ways for the companies to work together, but perhaps investors are on to something by balking at this deal. Not surprisingly, SUNW stock plunged on this news, shedding more than half its value from its prior high. However, the name is retaining a market value in the area of $82 million, or almost six times Peck’s offer.
Initially, Peck had some leverage. Its offer was going to provide Sunworks with needed capital to clear its order backlog. Conversely, a case can be made that the target didn’t adequately capitalize on its own leverage, that being exposure to the lucrative California market where Peck doesn’t have a footprint.
Among the large states, none can touch the Golden State when it comes to policy favorable to the renewable energy industry. As just one example, a recently added state law requires all new homes built in California to have solar panels. In other words, if a company is a domestic solar outfit, it behooves the enterprise to have California exposure.
Redemption Possible, But Expect Volatility
To its credit, Sunworks is trying to show investors the sun also rises without the Peck deal. Earlier this week, the company said it sold $20 million worth of equity, some proceeds of which will be used to repay a $2.7 million loan.
In theory, that’s a small obligation, even for a tiny company like Sunworks, but ridding the balance sheet of that debt is a plus for Sunworks and its investors because the loan carried a whopping interest rate of 9.5%.
Going forward, the concern for investors with Sunworks isn’t how the incoming Biden administration will benefit renewable energy names. His victory is already baked into solar stocks. Rather, Sunworks needs to prove to investors it’s a viable entity without an acquisition offer on the table and that it has the resources to work through its backlog. For instance, the company won $10 million in new orders in the third quarter, but it has to fulfill those orders to deliver for investors.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
