Over the past six months, Sunrun (NASDAQ:RUN) has been absolutely dismal for its investors, destroying nearly 60% of investor value. In spite of RUN's trajectory toward ruin, the stock remains my top choice for my June seasonality portfolio in Timing the Market. Let's take a look.
RUN initially caught my attention for its seasonal pattern for June. Over the past six years, a long position in only June has been 57% more profitable than a buy-and-hold strategy. That is better than it actually sounds because it also implies 11 months of capital you can put to use (i.e., not tied up in stock).
Take a look at the result of holding RUN over June only versus holding RUN since its IPO:
In every category, from risk/reward (e.g., Cagr, Sharpe) to volatility and drawdowns, holding RUN over June only beats buy-and-hold. A closer look at the numbers shows an average gain of $4.06 over profitable Junes and an average loss of $0.41 over losing Junes. That's a kurtosis trade on the long side, as long as we get at least nine profitable Junes for every losing June - and we do: 83% of the time, RUN ends June in the green.
Moreover, the seasonality of the solar sector alone cannot explain this pattern. Using as my comparison the Invesco Solar ETF (TAN), of which RUN constitutes nearly 5%, I find that RUN's June excess returns as statistically significant. TAN does show strong June seasonality but only produces 0.78% ROI per year for the same seasonal strategy as above, compared with RUN's astounding 22.5%.
That is, RUN produces alpha over June, notwithstanding sector or market seasonality.
Over my years of studying seasonality, I've found that for stocks such as RUN, for which seasonality seems unexplained despite sector or macro trends, earnings often reveal the answer. RUN, however, has below-average earnings volatility, which usually means that investors do not react strongly to novel information (e.g., earnings or other news). However, for some stocks, earnings updates are priced in slowly, and so we see some reliable seasonality patterns after earnings reports.
RUN shows such a pattern after its Q1 earnings. Today, I want to dive into RUN's Q1 earnings call for this quarter, employing a financial lexical analysis. Studies on this form of analysis have found strong connections between management sentiment in financial disclosers and stock price returns, essentially allowing us to gain predictive power when we know sentiment changes among management.
In my analysis, I use standard financial lexical analysis methods to label forward-looking statements as either optimistic or pessimistic, calculating an overall sentiment score for the entire earnings call. I normalize by length so as to make comparisons across earnings reports. In my analysis of RUN's earnings reports, I found an important shift for the current earnings report, namely that sentiment turned positive.
The sentiment changes over the past year are plotted with the stock price, below. You can see that the stock price has roughly followed management sentiment, with the precipitous fall in sentiment occurring just before the painful fall from $60 to $20. The current earnings call marks a change in sentiment, from pessimism to optimism, implying good things for the stock.
Statements flagged as optimistic in my analysis help shine light on the fundamental reasons influential in the change in management sentiment. Some follow.
"Customers see escalating energy costs and a lack of reliable power all around them and they want the security and peace of mind that comes with energy independence."
- The last six months or so, rising costs have become a major factor for all businesses, including Sunrun, whose business is highly reliant on labor costs and material costs. However, the rising costs in the energy sector is likely to prove beneficial for Sunrun, as it can drive more people toward solar. Indeed, summer seems to be a month in which many people declare they've had enough, looking for solutions, and this summer is set to be one of unreliable power for California, Sunrun's main market. This actually might help explain some of RUN's June seasonality.
"There's some chance, I guess in there, but demand continues to rip and that, again, creates a drag on reported values, but with where we are right now and what we see, we feel confident our ability to execute and get to this level."
- Right now, Sunrun is seeing levels of demand that cannot currently be met. The company has a significant backlog, which is a problem. Nevertheless, this is a quality problem and can be just as bullish as it is bearish for a company. As the supply chain issues subside, we should naturally see an increase in the company's sales and revenue numbers; it's a waiting game at present.
"I am still very optimistic about the long-term cash flow capabilities of the business for that reason? It's not like we are the only energy company that capital costs is an input too. So capital costs may go up that can pressure us, but it presses everybody up. So everyone else's price is up. We price up and lo and behold, everyone still makes money…Material costs and interest rates have increased and we have taken fast and effective action to adjust to these industry-wide dynamics, in a way that will make us faster, better and stronger."
- With regard to the inflationary environment, management is not palpably concerned. These issues are seen as significant headwinds for the solar sector, but management remains optimistic that prices can be increased to account for this problem.
"And I think just stepping back like everyone in government has made really clear how frustrated they are by this petitioner and by this petition. And the Commerce Department has used language like our hands are tied in terms of opening the investigation. I think the chance of a negative investigation here, a negative result is very, very low."
- Sunrun is also not concerned about the most recent perceived bearish catalyst for the solar sector. The company believes that the investigation is most likely a formality and won't be affecting the current legal environment.
With both seasonal and post-earnings bullishness, the data support a long position here. We will be adding it to our June portfolio in Timing the Market. But I have a more conservative strategy for those who just want to get their feet wet. Here is my idea.
With the market selling off and with RUN's increased volatility, put options are more expensive than usual. I see this as an opportunity to sell puts. While selling puts has the same downside risk as buying stock, you also stand to profit should RUN consolidate (i.e., trend sideways). A put is mathematically equivalent to a covered call, and so, if you're already holding RUN, you can just sell out-of-the-money calls against your position to create the same position.
Sell Nov18 $20
I like these puts because you can easily hold them through the whole summer with peace of mind, seeing that RUN would need to fall to 30%, to $16.25, for us to start to see any losses. Of course, if you want a more aggressive strategy, just buy the stock, as we will do in our June seasonal portfolio, which necessarily employs more risk-tolerant investing. But for those more risk-tolerant, the above strategy offers a very attractive risk/reward curve for an exciting stock in a volatile sector.
Let me know your thoughts.
Missed this earnings opportunity? At least don't miss out on our next earnings play. Join us here:
If you want:
This article was written by
Damon Verial is a statistical analyst who uses his skills to research stocks, options, and investment strategies. In addition, Damon is the writer of Copy My Trades, a trade-alert, subscription-based newsletter, available at his personal website. He is also the writer of Exposing Earnings, an in-depth earnings prediction service here on Seeking Alpha.
Damon makes his living as a gap trader, an earnings trader, and an interday trader. In his free time, he writes for Seeking Alpha, where he focuses on seasonal investing, market timing, and earnings analyses.
Damon has written several successful stock analysis algorithms, including algorithms that can predict gap closure, intraday patterns, and news overreactions. They will soon be publically available for subscribers.
Damon’s undergraduate education was in statistics and mathematics at the University of Washington; his graduate education was in psychology at National Taiwan University. He currently lives in Fukuoka, Japan.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in RUN over 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.