What: Shares of renewable energy developer SunEdison Inc (NYSE: SUNE) dropped as much as 17% today, the third straight day the stock has fallen double digits. By market close, it had settled at a loss of 7%.
So what: It was a bad day for energy stocks in general, but SunEdison was hit by analyst Gordon Johnson at Axiom Capital downgrading the stock to a sell rating. It sounds crazy, but based on Yahoo! Finance data, this is the first analyst to have a sell rating, with 13 analysts still keeping a buy rating.
The downgrade was made because Johnson said the company didn't meet its own promises for third-party sales volumes or margins. Without strong margins from project sales, there's little chance the company will be able to pay back $11.7 billion in debt, and with the stock falling to a $1.4 billion market cap, even an equity raise may not be possible at this point.
Now what: SunEdison won't be going bankrupt soon, but it has a shortening leash from the market to turn operations around, and it doesn't look like that's going to happen. Ironically, the falling conditions for SunEdison and its yieldcos are holding back other renewable energy financiers and increasing the cost of capital for the acquisition of future projects. In short, what buyers are willing to pay for projects is going down, leading to low margins.
What's exacerbating the losses is the likely sale of shares by hedge funds, which had made it one of the most popular stocks in the hedge fund industry as recently as this summer.
This may seem like a company with big upside in a booming renewable energy market, but it isn't built on a solid foundation and probably has too much debt to survive through 2016 without new capital. With analysts and hedge funds dumping the stock and the company's very survival dependent on a high stock price, I don't think this is a story that ends well for SunEdison.
Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.