After plunging from a high of $300 in 2008, the Guggenheim Solar ETF (TAN) now sits around $22.35 a share.
Even after a tax credit-fueled rally, and the 2015 Climate Change conference that thrust solar related stocks back into the spotlight, growth, debt, high-flier bankruptcies, and widespread industry losses remind us of the dangers involved in the sector, especially with energy prices at multi-year lows.
Over the last five years, more than a hundred solar companies filed for bankruptcy, including LDK Solar. Many others now find themselves in a literal wasteland of failed companies that have cost governments and investors billions…
Solyndra – for example – cost U.S. taxpayers $535 million.
Spanish green energy company Abengoa just filed for bankruptcy protection after securing billions of U.S. dollars to build solar power and biofuel plants…
Summerlin Energy Las Vegas LLC just filed for voluntary bankruptcy last week, as applications for rooftop solar in Southern Nevada fell 93%.
The stink of bankruptcies, ridiculous debt, and insolvencies have even impacted some of the bigger names, like SunPower (SPWR) and SolarCity (SCTY) – both down an average of 43% from late 2015 highs…
Fortunately, failure has yet to hit industry giants, like First Solar (FSLR) -- up 58% since October.
But it could be lights out for more in just days…
Since July 2015, shares of SunEdison Inc. (SUNE) quickly sunk from highs of $33.45 to less than 50 cents just last week – a 99% death spiral.
And we’re not likely to see much improvement.
Drowning under the weight of more than $12 billion of debt, rising costs of capital, recent delays in financials, and failed deals, it posted a $1.1 billion loss last year.
In fact, when all is said and done, bankruptcy could very well destroy the company that once referred to itself as the biggest renewable energy developer in the world.
It certainly will destroy shareholder value.
Even its subsidiary TerraForm Global has noted, “There was substantial risk that SunEdison will soon seek bankruptcy protection.”
All of this has pushed the once high-flier into penny stock status with many investors fearing the very worst.
But has the worst been priced into the stock?
March was a terrible month for the company. Vivint Solar (VSLR) ended a merger agreement with it, and then sued SUNE. A week later, SUNE announced it would delay its quarterly and yearly earnings report for the second time.
Then, as of last week, the company disclosed a subpoena from the U.S. Department of Justice and a similar inquiry from the U.S SEC, too.
These are all indications that SUNE is going to file bankruptcy.
However, the idea that SUNE’s woes are a sign that renewable energy is failing overall is just not correct. It’s failing because the team that runs SUNE took on far too much debt, without proper analysis.
First Solar – for example – has created a profitable business.
What we may see here is an opportunity to buy cheaper, successful solar stocks on the demise of SUNE. In fact, the loss of SUNE may make it easier for companies – like First Solar and Canadian Solar to win even more projects along the way.
There’s always an opportunity as major players drop out of the market.
The bottom line with SUNE is that it deserves to be trading well under a dollar. The fundamentals, the debt, the mismanagement of deals sent the stock to such low prices.
But as we noted in the April 2016 issue of The Cheap Investor, there will be a few winners, and the best way to find them is to carefully analyze their fundamentals, including cash, debt, book value, revenue and net income.
In fact, as we’ve proven over the last 30 years, strong fundamentals will determine how well a stock will survive a downward trend in its industry… Likewise, enough cash and income will allow a company to restructure and position itself to profit in the next upward trend, as well.
Look at oil for example.
With the plunge in crude oil prices, the oil sector has been suffering similar hardships. Many oil stocks have poor fundamentals, and some will not survive.
But there are a few with the assets to weather the downturn. They’re the ones we will wish that we had bought at such ridiculously low prices two years from now.
In fact, with this in mind, we started searching in January for oil stocks that would be survivors.
In the February issue, we recommended Helix Energy Solutions Group, Inc. (HLX) at $3.50. Even though revenues and earnings plunged, the company was still profitable, and we thought it had the assets to survive. The stock fell to a low of $2.60 and then soared to $6.09 or +74% from our $3.50 buy. We recommended McDermott International, Inc. (MDR) in the March issue at $2.97, too.
Three weeks later, McDermott’s stock rose 50% to a high of $4.44.
Even as industries suffer under the weight of debt and mismanagement… and even low oil prices, there are plenty of winners to be found by analyzing the fundamentals.