“SEC Lifts ‘Blackout’ … Unlocks access to a $3.2-billion solar portfolio” (Wall Street Daily)

Sniffing out the solution to the "RED BULLETIN" teaser from Wall Street Daily's Publisher Series

By Travis Johnson, Stock Gumshoe, September 17, 2014

This appears to be the “hot” story of the day, given the number of alert Gumshoe readers who have been forwarding it along (you can always submit your teasers, too, or forward them to ILoveStockSpam[at]gmail.com — the more the merrier!) — it’s from Wall Street Daily and is selling their Publisher’s Series as a quarterly offering for $7.95.

So this is not a particularly expensive newsletter — it’s cheaper than our own premium service (the Irregulars, which a select few of you have already joined), but should we sign up for $32 a year to find out what the stock is? Or should we just do some figuring and find out what it is on our own?

I think you know what my answer is — subscribe to their newsletter if you want to, but figure out something about the stock or strategy first so you can think about it more rationally. Don’t ever subscribe to anything just to discover a “secret” … if you do, you’ll not only be paying for something you might be able to learn about on your own, but, perhaps more importantly, you’ll be subconsciously driving yourself to believe in the “secret” because you paid for it. No one wants to sign up for a newsletter, get their “red hot” special report, and then say “meh, not a great invetment for me” … your brain works against you, imbuing the paid-for information with far greater importance. Even if it is only eight bucks a quarter.

Same goes with our premium stuff, by the way — it’s not necessarily better or more predictive than all the free stuff you’ll read, it’s just more fuel for you to shovel into the boiler. I hope it helps, but I’m not consciously being “smarter” when I write specifically for the Irregulars.

But anyway, you’re here to find out which solar stock Robert Williams is pitching as the subject of his RED BULLETIN that will be TAKEN DOWN AT MIDNIGHT! Yikes! Better hurry!

Here’s how he pitches this “reject” stock that he thinks will do well:

“Wall Street ‘Rejects’ Clobber The Market

“Everyday investors are seeing 142%… 306%… and even some ‘moon shot’ gains like 629%…

“All from opportunities Wall Street insiders utterly reject as ‘not worth their time or money.’

“Now a new Wall Street ‘reject’ promises to soar….

“Normally, it’s the Wall Street insiders who make the big money on the backs of the ‘little guy.’

“But here, the little guy is coming out on top.

Who doesn’t find that appealing? He then runs through a litany of “reject” stocks that shot up dramatically with 100%+ gains, and claims that “almost every one” does fantastically…

“Just this year alone, more than nine blockbuster “rejects” have debuted, and at least 55 more are in the works.

“In each and every case, company execs, and likely even some Wall Street insiders – the best and the brightest – have resolutely turned their backs on these mega opportunities. That is, rejecting them outright without even taking a second look.

“And yet, from nearly the moment of ‘rejection,’ almost every one of these opportunities is seemingly destined to soar to double-, triple-… even quadruple-digit heights.”

So it’s clear (though he never uses the word) that he’s teasing spinoffs and carve-outs and the like — the companies that are created when a corporation separates part of its business and either sells it in an IPO or spins it out to current shareholders (or some combination of those). They happen all the time, they are designed to help increase the valuation of the whole by separating it out into logical parts that might be given better valuations by the market — often companies want to spin out either noncore businesses or businesses that have very different metrics or might appeal to different kinds of investors, like when National Oilwell Varco (NOV), a high-margin oil drilling equipment maker, spun out it’s low-margin distribution business (Now, ticker NOW) earlier this year, or when timber REIT Rayonier (RYN) spun out its performance fibers manufacturing business as Rayonier Advanced Materials (RYAM). (I own NOV, NOW and RYN, I sold my RYAM, just FYI — those are simply examples that came quickly to mind — and interestingly, those were both cases of the CEO leaving the parent to go with the spinoff, which is a little unusual.)

The point of a spinoff is to create value for the investors in the parent, first and foremost, but also to give the spun-off division or business the freedom to raise capital and focus on a business that may not have been core to the parent’s strategic goals. The general idea is that bringing more focus to this smaller company, and letting it run independently of the parent’s plan and without the overarching bureaucracy of the larger company, will allow it to perform better.

But the rub is, it very often creates a company that investors don’t really want — either because it becomes a position that’s so tiny that it’s not worth thinking about and following, or because it doesn’t fit a manager’s strategy or mandate or an individual investor’s preferences. In my case, I sold Rayonier Advanced Materials because I owned Rayonier primarily as a timber REIT and wanted the exposure to timber and the compounding REIT yield, not the performance fibers business that fluctuates much more and depends on hard to calculate stuff like the demand for cigarette filters and disposable diapers and new competition. Lots of investors, both institutional and individual, therefore decide to sell their (often paltry) shares of the spun-off company within a few weeks of receiving the shares… and there’s usually no embedded Wall Street boosterism for these spun off shares (often no analysts follow them right off the bat, and they get relatively little press coverage), so that lack of demand for shares drives the stock down. On average.

This, as you’re imagining right now, creates an imbalance in the market and, often, a buying opportunity. Spinoffs have been pretty well studied, and the academic research indicates that, on average, spun-off shares significantly outperform the market during the period from several months after the spin to at least about 18 months after the spin, though it looks like the time period can be tinkered with and interpreted different ways. There are plenty of investors who focus on spinoffs, and several institutional research companies (Spin-off Research has a good free page describing the mechanics of the different kinds of spins, FYI), but for individual investors it’s generally a slog to do lots of news scanning and using search alerts from Google and elsewhere to locate the quieter ones… and there’s also an ETF, Guggenheim Spin-Off ETF (CSD), that aims to turn the historical tendency of spinoffs to outperform into a tradable vehicle — it’s only been around for eight years, during which it did much worse than the market average during the 2008-2009 crisis and much better than the market in the last four years, so don’t buy it if you think the market’s going to go sharply down tomorrow — it’s volatile, but might be worth checking out if you like the dynamics of spinoffs and don’t want to trade or follow individual stocks.

But we were looking for the stock teased by Robert Williams, right? Back on track we go… here’s how Williams introduces the particular idea:

“Imagine an ‘IPO’ Created for the ‘Little Guy’ ….

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...

“I’m going to share with you my research into a remarkable and time-sensitive opportunity to pocket up to 533% in gains, while also securing a 20-year income.

“Oh, and the income is expected to rise by 15% a year for at least the next three years….

“It’s almost like a major IPO, but ‘in reverse.’

“With little Wall Street attention, the everyday investor finally gets first dibs on new shares at the best prices.”

Huh — well, we will keep our skepticism in check and not focus too much on the fact that stuff created by Wall Stret for “the little guy” is not always to that little guy’s benefit. So which one is this?

“It’s happening inside of an industry Wall Street bigwigs love to ‘reject.’


“I’m talking about a solar opportunity very different than what you’ve ever read about before….

“There’s also a virtual slam-dunk certainty that this new solar play will deliver 20 years of income rising 15% per year, at least for the first three years….”

We also get a bit of an essay on the new era in solar energy — with production and efficiency rising, costs for solar panels coming down dramatically, and huge future potential. All of which is true to at least some extent (though energy storage remains a big challenge for both solar and wind).

And then a few more clues:

“This solar innovator is riding high on solar’s falling costs, skyrocketing demand, and growing efficiencies that I’ve just shown you.

“But it’s taking it all one giant step further…

“You see, this solar innovator has found a way to profit purely from the solar energy it produces and sells.

“This means it has distilled the very best solar offers – clean, safe, abundant solar energy – and achieved complete immunity from fickle business cycles….

“By virtue of contracts built into its founding charter, this innovator has…

  • Built-in profits for at least the next 20 years with 1.3 gigawatts of power-generating capacity.
  • Built-in new generating capacity additions of 15% per year.
  • Built-in cash payments to shareholders designed to grow with capacity.

“Yes, this solar innovator is new… but its parent company has virtually guaranteed its success by giving it abundant cash-generating assets from the start.

“Even better, these assets are located in the United States, Canada, Europe, and South America, thus immunizing the company from the possibility of currency ‘wars’ or simple fluctuations….

“This is why one expert intimate with the numbers estimates this solar innovator will quickly grow into a company worth $800 million to $1 billion.”

And that’s that stuff about the SEC “blackout?” Here’s how Williams puts it:

“… up until very recently, the SEC has imposed and enforced an information ‘blackout’ on this opportunity.

“The (misguided) point was to level the playing field for all investors.

“But as a result, most regular investors have no idea this opportunity exists.

“Many of the funds, institutions, and individual investors that were given shares at the start have sold them off for peanuts on the dollar.

“Major selling and the lack of information have kept a lid on this explosive opportunity, but pressure is building as information leaks out.”

OK, that’s enough — so what are the WSD folks pitching today for their Publisher’s Series? We shoveled up all those little clues, including the ones that smelled kind of funny, and poured ’em right into the gaping maw of the Mighty, Mighty Thinkolator … and answers await.

In just a second. Still processing.

There we go! This is: Terraform Power (TERP), which is actually an IPO that was offered up by solar power company SunEdison (SUNE) a couple months ago. SunEdison is the new((ish) name of a company I owned a long time ago, MEMC Electronic Materials, a firm which supplied the actual silicon wafers for semiconductors and solar panels. They have been refocusing on solar power projects and they IPO’d their semiconductor wafer business (Ticker SEMI) earlier this year, in addition to splitting off some of their power generation projects (along with a future backlog of “drop down” assets) into the yieldco that they called Terraform Power. After separating off that ownership in a fairly complicated structure (which SUNE still controls), they issued shares of Terraform Power in an oversubscribed IPO.

And yes, there was a “quiet period” or “blackout” for about a month after the IPO when sell-side analysts weren’t able to publish coverage on (or boost) the stock, that period expired about three weeks ago. There are a couple analyst recommendations out on TERP now, with one “strong buy” that came out immediately after the “blackout” and a couple holds, with price targets ranging from $32-36. It’s at about $30 right now, and has had a volatile first couple months as a public company, it was a huge hit at the IPO and surged by 30% or so but since has bounced from $33 to $30 and back and forth a couple times.

This is one of several “yieldco” companies that have been spun off or IPO’d or carved out in the energy space, mostly alternative energy, and they essentially are designed to monetize the long-lived assets of a power company, in this case SunEdison, by giving investors what they want: dividend income.

Yieldcos are similar to REITs or MLPs in that they take the cash flow from long-lived and steady operations, in this case solar power installations, and turn it into distributable cash for investors that’s paid out in the form of dividends. Unlike REITs and MLPs and BDCs, they don’t necessarily have particular special tax status, and they’re not direct pass-through investments like those traditional income equities are — but it looks like the yieldcos themselves must have a pretty good dose of tax credits and incentives for their power plants that helps to cut the tax burden at the corporate level. Like MLPs, they take advantage of the fact that depreciation generally happens faster on the income statement than it does in the real world, so they can focus on cash flow yields (instead of “earnings”) and getting those yields out to shareholders. For a while, at least — I don’t know what the lifespan of a solar panel is, or how long it will take for their installations to erode in value without replacement or other capital investment.

And frankly, the yields are not that impressive. From what I’ve seen, TERP plans to pay a dividend that annualizes to about 90 cents (they haven’t paid their first quarterly dividend yet, but presumably will do so soon), which would mean a yield of about three percent on the current share price. This is a great low-cost way to get additional capital for SUNE (which is already a very highly levered company), but whether it works out to be a great deal for shareholders who are buying TERP for the 3% yield and the anticipated future growth is a more open question. TERP has said that they believe they can grow the yield by 15% per year for at least three years based on the backlog at SUNE — they will do this buy buying into more SunEdison projects that SUNE is contractually obligated to “drop down” to them at agreed-upon prices, and perhaps by buying projects from other owners as well.

That would mean, if their projected dividend growth is accurate, that they could be paying out $1.20 per share in three years. What do you pay for an income investment with a projected 15% dividend growth rate and a pretty high degree of uncertainty after that? I have no idea, but if you’re still willing to buy it at a 3% yield after it has grown the dividend for those three years, you might conceivably be willing to pay $40 for the shares. I find it fairly difficult to be more optimistic than that, given the fact that they will have to raise capital to pay for all these drop down assets that they’re going to buy from SunEdison, but if you think that this kind of dividend growth merits something more aggressive, like a 2% yield, then perhaps the stock could double to $60 in three years (note that the projection from the company is for 15% growth for three years, they’re not saying much about growth out beyond that).

And on the pessimistic side, a 3% yield for what I assume will in effect be a levered, yield-focused financing vehicle seems awfully low — even if interest rates stay at near zero, there’s reason to be cautious that investors will continue to accept a 3% yield as a reasonable payment for the level of long-term uncertainty in TERP… and if rates or inflation rise substantially, there’s no guarantee that TERP’s contractual income will rise with inflation.

That gets to be more of a question about how the business performs over a decade than how it performs over the next six months, since the stock could certainly double for all I know, but there are lots of longer-term risks that make me really skeptical of the teased potential for 500%+ gains. If solar panels are dramatically more efficient in a decade, and there’s no renewable energy credit (credits are about 45% of their revenue now, actual electricity about 55% as of the last quarter), then the cash flow from their assets shrinks and the value of their installed assets shrinks and future power purchase agreements may not be as favorable as the ones they have today.

And when it comes to stability and predictability, these are not oil pipelines, Which can be reasonably assumed to stay relevant and uniquely useful for at least 30 years (quite possibly 50 or more) with a decent amount of maintenance. Nor are these heavily regulated power generation utilities that have nearly guaranteed profitability and revenue growth like some of the big utility stocks (particularly the Southern ones where there’s more demand growth, if you’re talking electric utilities). You can generally get yields of 5-6% on pipeline MLPs and 4-5% on big utilities like Southern Co (SO) or Duke Energy (DUK) these days, though those have recently grown their annual payouts by more like 2-4% on average. So clearly investors are interested in TERP not just for the 3% yield, but for that future growth that they think might balloon the yield. And people do pay more for dividend growth than they do for current income — it’s just that when you pay up for dividend growth stocks you’re usually paying for a strong, established history of hopefully 10-15% dividend growth from a strong company, not a projected 15% from a new company. Coke (KO), for example, pays a 3% yield and grows the dividend by almost 10% a year.

Will it work out for TERP? Well, my initial reaction is that I’d rather own the company dropping down the assets (and keeping control) than the company taking the dropdowns and distributing all their cash and raising more money to buy more dropdown assets. But that’s just a quick reaction, I have not scoured through the filings of TERP or any of their competitors.

There are several other yieldcos that are fairly similar — NRG Yield (NYLD) is the yieldco for NRG Energy (NRG) and in that case the yieldco has dramatically outperformed over the past year (TERP and SUNE have done more or less the same over the last couple months), and others include Abengoa Yield (ABY, parent is ABGB), NextEra Energy Partners (NEP, parent is NEE), Pattern Energy (PEGI, private parent) are the US-listed ones I’m familiar with… and there are others that are somewhat similar, like Brookfield Energy Partners (BEP). There’s a decent listing here at SeekingAlpha of these and others and some of their basic info, and that’s also a reasonable place to check some of the pro and con arguments — a writer called Casual Investor has a string of pretty thoughtful and critical articles about TERP and the others including this one, and Don Dion liked the IPO (though I would like it a lot better with a 4.5% yield, too, that’s what was indicated at the $20 IPO pricing before it jumped to $33 by the time trading began).

And yes, David Einhorn’s Greenlight Capital and the other institutional investors probably “rejected” this, as teased — Greenlight is the largest investor in SunEdison but would probably not be interested in this “yieldco,” yieldcos are usually the kind of thing that activist investors push companies to create in order to “maximize value” and reduce their cost of capital, not the kind of thing they want to buy themselves.

So… is this an appealing 3% yielder for you? Think TERP or any of the other alternative energy yieldcos are worth our while? Let us know with a comment below.

Irregulars Quick Take

Paid members get a quick summary of the stocks teased and our thoughts here. Join as a Stock Gumshoe Irregular today (already a member? Log in)