As SunEdison (SUNE) prepares to declare bankruptcy, it is important for investors to reflect and learn from the SunEdison saga. Investing is about making informed choices with whatever information is available and one important source of information is fellow investors. Seeking Alpha as a platform is designed to get investors to communicate with each other and help everyone arrive at actionable ideas.
There are always important lessons to learn whenever an investment succeeds or fails. I asked contributors and commenters to reflect on what they've learned from SunEdison. This piece highlights important lessons learned from some of the most prolific contributors and commenters on SunEdison.
What Contributors Have Learned
A lot of contributors on Seeking Alpha have provided smart commentary on the company. Although the bears were ultimately correct in this case, each contributor learned various lessons from covering SunEdison.
Below are lessons that two of the most prolific contributors on SunEdison have learned from following the company.
"Financial engineering is a beast, if untamed, can destroy companies. The ongoing revelations indicate that the management either did not understand or underestimated the challenges of taming this beast.
We are reminded of a powerful quote from disgraced CEO Ramalinga Raju of Satyam Computers to explain the disintegration of his company. "It was like riding a tiger, not knowing how to get off without being eaten"
Unwittingly, Ahmad Chatila and team became victims of the financial engineering that they championed.
One thing I've learned is that if the balance sheet is too convoluted to understand fully, it's probably a good idea to stay away. I spent a long time analyzing it and thought I had it figured out multiple times, only for yet another thing to pop up I hadn't considered.
What Commenters Have Learned
The first article I wrote on SunEdison last September received only 36 comments. Most articles now receive well over 100+ comments with many valuable insights and comments. Below are lessons that commenters have learned from SunEdison.
I won't pull any punches - SUNE [along with Valeant and a handful of other companies] has led me to be deeply skeptical on the idea of efficient markets. Between (1) the bubble that analysts created with high price targets, (2) the perpetual rumour mill, and (3) the lack of communication from management, retail investors never had a chance with SUNE.
The system also seems broken, notably, SUNE's independent audit committee found no wrongdoing, only an "overly optimistic culture." That seems patently wrong to me, clearly something went seriously wrong with the company yet no one will be punished.
There are lots of things I've learned about SUNE in general. There are a few things that stand out.
(1.) Nothing is ever too big to fail. I already knew this but at times, I was inclined to think otherwise.
(2.) If you can't really follow the financials, especially after tens of hours of studying, you might want to stay away. For me, SUNE was always a roulette spin. I knew it would blow up, never sure which direction at any one time. I was long (always options) because it could go much further in that direction. But, I'd never have bought it long term as an "investment", because I could never wrap my head around its accounting.
(3.) If a company is non-communicative (regulatory quiet period excluded) and even worse perhaps, intentionally obtuse, which I think SUNE was, it's not an accident. They're hiding something. The quiet part can be not wanting to tip their hand to competitors etc. The intentionally obtuse part, they don't want to be honest with shareholders.
(4.) This one may seem to be the strangest of all but what I learned most of all from my whole experience with SUNE, was about people. Long ago I read the book Extraordinary Popular Delusions and the Madness of Crowds. I remember feeling both a fascination as well as a sense of horror and incredulity at for example, The Dutch Tulip Bulb Craze when people became so obsessed with buying tulip bulbs because they were convinced that they were a can't miss investment. Tulip bulbs began selling for what might be the equivalent of tens of thousands of dollars today. No one could see the folly in any of this until a drunken sailor, picked up one of the most expensive bulbs, I think it was up for auction, and in front of a huge and horrified crowd, ate it, thinking it an onion. Thus shocking people into seeing the absurd reality of tulip bulbs as an investment. Like the tulip bulbs, it was shocking for me to see people sinking enormous amounts of money, repeatedly, into SUNE regardless of the news. In fact it often seemed that the worse the news got, the more they bought.
I'm left with a sense of sadness and loss for the people who so fervently believed. Personally, I broke even, more or less, financially, but I gained as a person. I felt like I had a window into the minds and hearts of many, without the blinds pulled. It was both a strange experience and one that I feel I grew from and will hopefully always appreciate.
I invested in it back in 2014. By the beginning of 2015, EVERYONE loved the stock. Then they made the VSLR deal and the stock tanked. I continued to try to catch the "falling knife". Most of the analysts were still very positive. I had too much faith in them. Also, I believed what management said. They continued to tell their shareholders that everything was fine. Chatila even went as far as to say they could be cash flow positive by the end of 2015/begin of 2016. And Einhorn came on board. By on the board, I mean he finally got Claire Gogel appointed onto the BOD. So I really thought between the analysts, management's comments, and Einhorn they would get out of this mess.
So I continued to throw more money at them as the price got lower. By February, I promised myself I was not going to put any more money into it. I got way too emotional and away from how I have always invested.
But then March came and I truly believed they were releasing their 10k. So I put another 1k into them. Instead, the next day, I got the DIP talk story from debtwire. At that point, I realized things were pretty much going for BK and lost all hope. I didn't sell out until today. I debated what to do, but I just had enough of it. I heard someone else say it, but its true: You don't invest in companies as much as you invest in management. And it's true. SUNE's management was a disaster on so many levels.
So I learned not to trust what analysts are saying. There are probably 10 guys on SA that give better advice. Don't try to catch a falling knife. Take some profits off the table when you make some. When there are warning signs, maybe it's time to get out. Don't get emotional when you are investing. Hedge Funds might release what their stocks are: but that doesn't mean they aren't shorting the stock as well, or working some other angle to get their money back. So don't trust them.
I'm not new to investing, but new to trading as of last year. I happened upon SUNE as a volatile opportunity. They had a good chart in Oct. I actually watched them spike on the Tepper news - that was quickly denied. That should have been my lesson to stay away (news volatility), but it only took me in deeper. I traded some activity on them in small amounts 100-300 shares and made some and lost some.
When they tanked in November I bought in big based on the charts and averaged down. I don't think that having 100 to a few thousand shares (provided you can lose it all) when it was in the $3-5 range was a bad mistake. At the time we just had a few hurdles to clear and retracement to $6-8 on the charts was very doable. The tax credit was extended and the Paris result meant there was plenty of potential long term upside as well. I just bought in too deeply and refused to step to the sidelines once the waters got too murky.
The main lessons I've learned is - know when the information is stacked against your investment/bet. Realize that if the management is one of your main concerns, just move on. A company that requires equity or debt to thrive needs to have a good standing in the investment community and be as transparent as possible.
SUNE had poor management, extreme lack of transparency (super confusing financial structures), crumbling business model (yieldcos were at drastically low levels), high debt financing costs, lawsuits pending and inability to publish SEC requirements....this was prior to the DOJ/SEC debacles.
I'm too smart to have left my money in once these issues started stacking up. Much too late did I decide to pull out my capital and convert to long calls. Way back at the beginning this should have been about buying Jan 17 $6 out of the money calls when it tanked. A few thousand in - sell the rally and move on.
This has helped me to stay more disciplined in my investing moving forward. Set entries and exits - as information develops that is against my investment thesis, pull my money and add it to winners. Only buy a limited amount of options on damaged companies if you're betting on them rising from the ashes.
I have one lesson learned that when a company is going dark without communicating to shareholders for so long, I have to run and stay out.
There is a lot to be said about all of the comments above and lessons to be learned. As I reflect on these comments, a few key points stick out.
Above all, management is important. The lack of communication stemming from poor management led to significant losses for many investors.
Another point is legitimacy. The veracity of statements provided by SunEdison's management team remains suspect, as does the recently concluded internal investigation. Furthermore, SunEdison appears to have used complex financial engineering that undermined its ability to execute on building the legitimate portion of its actual renewable energy business.
A general lesson that investors should keep in mind is doubling-down on a losing investment is generally not a winning strategy. A lot of investors wanted to average down in the hopes of a recovery that just never came. Investors should always be extremely wary of trying to catch a falling knife.
There is a lot more that can be said about the SunEdison saga. For now, investors should reflect on what has happened and incorporate lessons learned from this saga to help inform future investment strategies.
I will also provide a follow-up to this piece that discusses lessons I've learned from SunEdison. Having written about this company since last September, I intend to provide one final reflection on the company.
A lot of investors got seriously burned because of SunEdison. But all is not lost, especially if lessons are learned and are then acted upon. I encourage investors to use the comment section of this article to share lessons learned from this entire saga.
Disclosure: I am/we are long SUNE, GLBL.
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.
Additional disclosure: I am long SUNE through call options. I fully expect to see the call options expire worthless in January 2017. I intend to use them as a tax write-off next year. Positions may change at any time and investors are reminded to complete their own DD before investing.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.