I was just blogged the other day about trying to find companies that had terrible legacy businesses that are obscuring attractive divisions and poof here is one. SunEdison (SUNE) is a name that popped up on my special situations radar a week or so ago. Despite the fact that it's up more than 125% since its IPO in mid-2013 many smart people believe that the company's stock has a lot more room to run. I don't remember exactly where I found the idea, but when I went long it in CAPS I said "Spinoffs of the semiconductor business and a Yield Co in the coming months should benefit SunEdison."
I noticed that it was up over 10% today and thought to myself, "Wow that was fast." Apparently news that the famous investor David Einhorn established a stake in the company last quarter has driven its share price up significantly today.
Here's the full Einhorn writeup on SUNE from his recent quarterly letter to investors:
"SUNE, formerly known as MEMC, is a developer of solar power plants for businesses and utilities. The declining cost of solar energy combined with the rising cost of conventionally produced electricity should position SUNE as a winner. The company has a large pipeline of attractive projects secured by credit-worthy buyers of electricity. Until recently, the good business was mixed in with two bad ones: manufacturing wafers for semiconductor companies, and assembling commodity solar modules for developers. Historically, the company's poor balance sheet forced it to sell many of its solar development projects at discounted prices to raise capital.
The company has now exited the solar module assembly business and is in the process of monetizing its semiconductor wafer business through an IPO. Later this year, we expect the company will IPO a newly-created Yieldco, which will house its most attractive solar projects rather than selling them to third parties. NRG Yield Inc. is a comparable company that trades at 12x EBIDTA and has a 3% dividend yield. Were Yieldco to trade at 9x EBIDTA and a 5% dividend yield it would imply a value for the solar business of ~$34 per share. SUNE expects to run its development business close to breakeven in future periods. Adding in the value of the soon-to-be IPO'ed semiconductor business and subtracting a modest amount of corporate net debt would suggest a sum of the parts value for SUNE of ~$35 per share. Our average entry price is $15.55 and SUNE shares ended the quarter at $18.84." [more]
This weekend I had a chance to dig into one of the newest books that I have added to my collection, Manual of Ideas: The Proven Framework for Finding the Best Value Investments.
I have to say, while it didn't knock my socks off it was pretty good. A lot of what it contains would be best for someone who didn't have much experience investing or with special situations. For example, there was a great chapter on piggybacking successful super investors that gives a list of ones to watch. This would be great for newer investors, but most of the ones on the list that I personally found interesting I was already following on my own.
I have picked up two interesting tidbits that I hadn't given too much thought about before so far. One, to look for companies that have large declining or stagnant legacy businesses with a smaller up and coming attractive smaller business that is being obscured. This is an excellent strategy. It makes me think of Cincinnati Bell some. It also makes me think of McDonalds before it spun off Chipotle. I was wracking my brain trying to think of other businesses out there that fit this mold, but haven't come up with many yet. Any ideas?
The other thing that I picked up is to look for companies that are saddled with a scary amount of debt that might be keeping some investors away. The key here is that the debt must be nonrecourse. That way a default wouldn't hurt equity holders. I really didn't come up with any of these either. This sort of thing was probably more before the credit bubble popped. Lenders are likely being more careful today, but you never know. Anyone know of any of these?
Anyhow, the book's pretty good. I'll post any other interesting tidbits that I come across. [more]
I mentioned yesterday that I had come across some interesting statistics about the outperformance of certain types of special situations. I have already talked about spinoffs. Today I want to mention a different type, demutualizations. A demutualization is the conversion of a mutual bank that is owned by the depositors into a public company. When these banks switch or "convert" to public companies, they usually do so in two steps...a first step or stock offering and a second step. [more]
Anyone who looks at my portfolio of stocks here in CAPS will see that I invest almost exclusively in special situations. I plan on talking about riding the coattails of activist investors and investing in demutualizations in the future because I've found some amazing statistics on the outperformance of those types of investments. Today I want to talk about investing in spinoffs. [more]