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The Rise and Fall
It was less than a year ago when the CEO of Sun Edison stood before a group of managers and boldly declared that SUNE would one day rival Apple and Google in market cap. His timeline was 2020.
His declaration was not dismissed nor laughed at, indeed it seemed to many of Wall Street’s brightest that this could actually happen. Everything was going well for Sun Edison.
Low interest rates, tons of investment cash, government benefits, and that was just the beginning. No one could argue that Sun Edison was ruling the solar market.
Less than a year later, with Sun Edison’s stock price down a whopping 95% percent from the day of the speech, they declared bankruptcy.
The market got wind of their problems shortly after the CEO’s speech. SUNE was doing all kinds of deals, continuing to make expensive acquisitions despite huge cash problems.
What seemed to be incredible growth was being fueled by unsustainable levels of debt.[/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″][vc_column_text]It finally all came crashing down when the company attempted to buy Vivint Solar (VSLR), a smaller company quickly growing in the residential solar industry.
The purchase price was around $2.2 billion. Investors began to look deeper into Sun Edison’s books and didn’t like what they saw.
Within weeks the stock had lost over 50% of its value. That was only the beginning.
As the stock continued to drop rumors began circulating that the company had mislead shareholders to give a better picture of their finances than they were in reality. Research also started to come out showing that the level of vetting that SUNE required before making a purchase was abysmal.
In fact, Chase Bank had refused to loan money after seeing their lackadaisical research.[/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column centered_text=”true” column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″ offset=”vc_hidden-sm vc_hidden-xs”][vc_column_text][the_ad_group id=”39″][/vc_column_text][/vc_column][vc_column centered_text=”true” column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″ offset=”vc_hidden-lg vc_hidden-md”][vc_column_text][the_ad_group id=”38″][/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″][vc_column_text]Later SUNE attempted to make money by spinning off a part of it’s company into a yieldco called TerraForm Global.
Unfortunately they raised just over half of what they expected, leaving them nearly $400 million short. And things just continued to get worse.
Suppliers and contractors started to have issues with payments. One of SUNE’s acquisitions fell through because SUNE didn’t have the money to finalize the deal.
So SUNE borrowed more, this time from Goldman Sachs. The interest rate was over 9%.
Another warning sign was the layoff of nearly 20% off their workforce.
Despite all the warnings, Chatila continued to announce rosy figures and give the illusion that the company’s finances were healthy. He spoke at investor presentations and in meetings with top officials, declaring that the company had plenty of cash to continue on its current path.[/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″][vc_column_text]
Things really came to a head when the investment firm that had loaned SUNE significant sums using their shares of TerraForm Global as a collateral for the loan, came knocking. After a lot of meetings and money movement SUNE was able to get the money from its spinoff, TerraForm Global, and payoff the $100 million owed.
That didn’t mean their troubles were over, however, just that they survived.[/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″][vc_column_text]
At this point the signs of bankruptcy were all over the wall. It seemed there was new news each week about a new problem, lawsuit, or issue with SUNE.
Many investors, most of them retail and stock market beginners, continued to hold shares, telling themselves a company that big couldn’t fall, or that it could sell some resources to survive. Sadder still were the investors that continued to buy in, convinced that the company had an ace of spades up its sleeve and would pull through.
[/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column centered_text=”true” column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″ offset=”vc_hidden-sm vc_hidden-xs”][vc_column_text][the_ad_group id=”39″][/vc_column_text][/vc_column][vc_column centered_text=”true” column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″ offset=”vc_hidden-lg vc_hidden-md”][vc_column_text][the_ad_group id=”38″][/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″][vc_column_text]Finally, after nearly 9 months of steadily dropping stock prices, the company declared bankruptcy. Shares that were selling for more than $30 less than a year before were selling for 20 cents. A company once worth over $10 billion was worth less than $50 million.[/vc_column_text][/vc_column][/vc_row][vc_row type=”in_container” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ width=”1/1″][vc_column_text]
Lessons
Falling Knife
There are a few lessons a beginning stock trader can learn from SUNE. The first one is to not catch a falling knife. This is most beginner’s top mistake in their first year of trading.
When beginners see the price of a company’s stock drop by extreme amounts they get suckered into thinking that this is a buying opportunity and that if the company can just get back where they were they will make huge amounts of money. This is not usually what happens.
Typically a large drop in stock price means the company has announced something or some news has come out that puts the company’s growth or profits at risk.
Imagine if Apple announced that they could no longer sell their iPhones in China anymore. The price of their stock would fall dramatically.
Would that make it a buying opportunity? Absolutely not. The reason the stock price dropped is because Apple is probably not going to make as much money as people thought, thus they should be valued less.
Typically when a stock starts dropping hard it keeps dropping hard for awhile. Then it settles down and the climb back up is long and slow.
It is much better to wait to buy until a company’s stock price has leveled out and started to climb again. You may miss out on a few dollars on the bounce, but you have a much smaller risk of losing a significant amount of your investment.
Fundamental Research
An investor who understands fundamentals would have been able to see warnings signs before the fall of SUNE. The company was in extreme amounts of debt, they were not bringing in nearly as much money as they projected, and they were continuing to spend at exorbitant levels.
A couple of hours of homework could have saved an investor millions of dollars, or even made them a large sum if they had chosen to short the stock.[/vc_column_text][/vc_column][/vc_row]
