Suntech (NYSE:STP) has been stuck in the penny range for quite some time as the company has declared bankruptcy after failing to pay $541 million in convertible debt on March 15. However, there is no clarity on how the bankruptcy will proceed as Suntech factories are still operating. Suntech used to be the largest solar panel maker in the world with more than 10,000 employees. It is difficult for the local government to let the solar producer simply die without taking some action. The stock saw a massive surge in volume and price yesterday due to a rumor about Warren Buffett buying the company. This is one of the most preposterous rumors that I have heard. The reason is that investing in Suntech makes no sense for anyone except the Chinese government. The solar industry is still in massive oversupply and almost every company is making huge losses. Suntech has a high debt level as well as high costs of manufacturing. Investing in Suntech would be one of the dumbest decisions anyone could make right now. I don't think Warren Buffett who is considered the smartest investor would make that decision. I would sell all my Suntech stock and bonds to take advantage of this rumor. Suntech has received a notice from Nasdaq and will soon be delisted. I think that the stock is being pumped up by investors who are still stuck in the stock. The Suntech stock may not trade in the U.S. markets for long and I would take whatever I could get.
Suntech Buffett Rumor has no chance of being true
Warren Buffett has recently invested in solar energy farms through MidAmerican Energy. However, these renewable energy investments are very different from directly investing in a bankrupt solar company. The solar power plant business is a lucrative one as it guarantees a return over 20-25 years. The power is sold through long-term contracts to utilities. While Warren has invested in a Chinese green company BYD (OTCPK:BYDDF) earlier, I don't think he would consider investing in Suntech in a million years. He has already burnt his fingers with the BYD investment. Besides BYD is a player in the solar panel business. Why would Warren want to invest in another solar panel company?
BYD has been investing in solar energy since 2010 but remains a marginal player
BYD's stock had multiplied after Buffett invested in the company however, the company has failed to perform in the last couple of years. Its core electrical vehicle business has seen a huge decline in sales and its unrelated diversification into solar energy has not paid off. The company has heavily underperformed the broader markets as it lacks a cohesive strategy
Build Your Dreams the Chinese battery and electric vehicle producer made famous after Warren Buffett made an investment has been facing rough times recently. Its falling auto growth, problems with land acquisitions in China and an incoherent strategy has hurt its profits and stock price in 2010.The Company has put on too many hats with investment in various green technologies besides its bread and butter car business. The most ambitious plans of BYD undoubtedly lies in the Solar Energy Business though little details have been revealed. The company is planning to spend 22.5 Billion Yuan on Solar Energy over the next 5 years for which it has already secured financing. The company has started a 100 MW cell plant in the Shaanxi province and plans to expand to 5000 MW by 2015. However, its recent travails had made one think that they would have put aside their Solar ambitions. However that does not appear so.
Suntech gets a delisting notice from Nasdaq
Suntech has been trading for less than $1 for more than 30 days and has got a notice from Nasdaq for falling foul of its rules. I don't think Suntech management has the time to manage a reverse merger [like JA Solar (JASO) and Daqo New Energy (DQ)].
Suntech Power Holdings Co., Ltd. ("Suntech" or the "Company"), one of the world's largest producers of solar panels, today announced that it has been notified by the New York Stock Exchange (the "NYSE") that the Company did not meet the NYSE's price criteria for continued listing standard because, as of April 4, 2013, the average closing price of the Company's American Depositary Shares, or ADSs, was less than $1.00 per ADS over a consecutive 30-trading-day period.
What you should do with Suntech stock and debt
I have received messages from many SA readers about what they should do with Suntech debt. I have advised everyone to sell their debt for whatever value they can get. I don't think the Chinese government will be too eager to bailout foreign creditors. Suntech has almost no chance of recovering and I don't think the $2 billion debt will be repaid. At best, the company would return some money to the local banks who recently sued the company in a Chinese court. The same goes for Suntech shares, which are up sharply due to the rumor.
Where do you invest in solar energy (if you can stomach the volatility)
Investing in solar energy is very hard given the stock volatility, company bankruptcies and massive losses. However, the industry has grown by more than 50% CAGR over the last 10 years and will continue to grow at a fast clip in the future. Solar energy has already reached retail grid price parity in a number of places in the world. What that means is that solar energy does not require subsidies from the government anymore. There are a number of good solar companies, which investors can look at. The Suntech bankruptcy has led to a sharp sector sell-off, which has made many of my favorite companies very cheap. Investors can look into the following stocks
I had written a very detailed article on shorting Suntech before the stuff hit the fan. The industry continues to be plagued by overcapacity due to the Chinese government support. However, the stocks are already pricing in the worst-case scenario, which is unlikely in my view. Solar demand is expected to rise this year to 35 GW and companies will need to survive in order to supply this demand. Rather than blindly investing in any solar company, investors have to be very careful in which stock they should put money in. The future of the solar industry remains very bright and companies that survive will see their stock prices multiply.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.