SunEdison (SUNEQ), the solar power plant developer, is somewhat of a consensus pick by the smart money. Steve Cohen's Point72 owns approximately 12.7 million shares. Leon Cooperman owns around 8.1 million shares. David Einhorn's Greenlight Capital recently established a significant position as well.
Undervalued company benefiting from long-term trends
In his most recent investor letter, David Einhorn gave two reasons for why he likes SunEdison.
First, Einhorn likes how solar prices are falling while conventional electricity prices are rising. According to GTM Research, the national average PV installed system price declined by 15% last year while the average cost of a solar panel has fallen by 60% since 2011.
Average residential retail electricity prices, meanwhile, have increased by approximately the rate of inflation over the past couple of years.
With solar becoming competitive against the grid in more and more places, solar companies like SunEdison will likely see larger markets and growing margins in the future.
Second, Einhorn likes how SunEdison has a large pipeline of attractive projects backed by credit-worthy customers of electricity. Einhorn estimated that, if the company spun off those attractive projects in a Yieldco, the total value of the Yieldco would be worth around $34 a share, or over 70% higher than what SunEdison is currently trading for. Einhorn also said he liked how SunEdison was keeping its attractive projects rather than selling them at a discount to others to raise capital. If this trend continues, SunEdison may have an even bigger pipeline of attractive projects in the future.
The bottom line
Having the support of major hedge funds is certainly good news for SunEdison. The company doesn't have a strong corporate ally like other major solar firms do.
SunPower (SPWR -3.09%), for example, has an ally in oil super-major Total, while SolarCity (SCTY.DL) has an ally in electric car company Tesla. In the competitive world of solar, an ally can mean the difference between being one of the winners or being like everyone else. An ally can provide a solar firm with much-needed capital in tough times. An ally's connections can bring more customers to the firm. Its support can lead to more investment in the firm and a lower cost of capital.
By counting legendary hedge fund managers as investors, SunEdison may have found its ally. There are plenty of investors who follow Einhorn and Cohen's every move. More institutional investors may invest in SunEdison because Einhorn and Cohen are in SunEdison. With more investment, SunEdison could realize a lower cost of capital, keep more projects on its balance sheet, and grow faster.
So far, SunEdison stock has shown remarkable relative strength. Its stock is up 51% year to date and held up well during the recent solar sector correction. A significant part of the recent rally could be due to copycat institutional buying. But if the smart money is right, the trend of a rising stock price could continue well into the future.
