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Liquidity Trap Leads To Opportunity For SunEdison Investors

2015 has been a fascinating year as many U.S. stocks have crumbled while U.S. market averages remain near their highs.

Indiscriminate selling now dominates select individual stocks as concentrated holders liquidate.

SunEdison's shares offer opportunity amidst its selloff, as its underlying business remains in a growth trajectory.

"Thinking is the hardest work there is, which is probably the reason why so few engage in it."

  • Henry Ford

"A man is like a novel: until the very last page you don't know how it will end. Otherwise it wouldn't be worth reading."

- Yevgeny Zamyatin

Introduction

As a market historian and avid market participant, I have been observing recent price action in individual stocks with a mix of fascination and foreboding. I have wanted to offer my thoughts on several occasions, but I remain confused by the price action, especially by the psychology towards unloved areas of the investment markets. Simply put, buying the winners has worked for the last several years, no matter their valuations, as anything with growth is a prized treasure in a low growth environment, while combing through the "discount bin" has often been hazardous and deadly to value investors, including myself, over this time frame.

From a broad market perspective, it has been difficult to fathom the unrelenting strength of capitalization weighted U.S. market indices, while underlying market breadth continues to narrow. Additionally, a number of high profile individual stocks, and an equal number of deep value investment opportunities, have been crushed as computer algorithms, oppressively low global interest rates, and a mountain of money raised and targeted for "distressed debt" investing, has appeared to accelerate the already hyper volatile stock prices of companies going through a realized or perceived downturn in their business.

From a dispersion standpoint, this is the widest ranging performance year in the U.S. stock market than I can remember over the past twenty years, rivaling even 2008 and 2009. Of particular interest, from my vantage point, is the fact that a number of material and industrial stocks continue to melt down, while the central planners at the U.S. Federal Reserve ratchet up the rhetoric of raising interest rates. If commodities, industrial firms, and emerging markets are signaling a deflationary/disinflationary downturn, and most central banks are easing, why has the Federal Reserve signaled their intention to raise U.S. interest rates? I have a macro theory as to why this is happening, that I will publish in a "market outlook" piece in the near future. As I have worked on this piece, I could not help but notice the renewed push lower in a number of "beaten up" U.S. stocks, and thus I am on the lookout for opportunity on the long side. With that premise as a backdrop, the common shares of SunEdison (NYSE:SUNE) appear to offer upside potential that far outweighs downside risk.

SunEdison's stock price has fallen far below the intrinsic value of its shares due to a complicated corporate structure, and a concentrated group of shareholders trying to squeeze through the exit door all at the same time. As selling abates and the firm's working capital and future cash flows are reaffirmed, short covering...


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