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Summary I suggested a long position in Terraform Power on November 20th as panic made the valuation very compelling. Recent newsflow has been positive and generated a 50% rally in the stock since my article was published. It is time to reassess the investment thesis and decide whether to keep or sell the position. Less than a month ago I wrote an article on Terraform Power (NASDAQ: TERP ) titled ” Terraform Power : buying when there is blood on the streets?” At the time the stock was trading at $8.4 and it has been on a rollercoaster since then with a lot of news coming in. At the moment of writing this article the stock is at $12.40 and, including the 35c dividend, generated a 52% performance in less than a month. That was quicker than I expected. But such a big move deserves some additional analysis in order to understand if the time has come to close the position. Recent newsflow A few days after my article, the company announced some management changes . This was not good news as the clear message sent to investors was that objective number one was to save the overall Sunedison / Terraform Power / Terraform Global Group. They called it “organizational alignment”; the way I read it was: TERP is in much better shape than Sunedison (NYSE: SUNE ) and needs to provide some help. As expected the stock reacted negatively once the decision was digested and understood: some of the risk is switching back to Terraform from Sunedison as the Group is trying to go back to the initial yieldco drop down strategy, thus putting at risk TERP’s balance sheet. My own reaction was frustration as the investment thesis was certainly weakened by the news. Luckily a few days later (December 1st) reputable hedge fund investor David Tepper of Appaloosa disclosed a very large position in the company and sent a letter to management highlighting his concerns on corporate governance: “Thus, it is obvious that the deterioration in TERP’s security prices and credit profile this month results from (among other things): (1) the transmission of financial stress related to its “Sponsor’s” ambitious growth objectives and over-extended financial commitments; and (2) TERP’s incomplete and selective disclosures”. Market reaction was massive and Tepper’s involvement acted as a confidence booster. What particularly pleased the markets was that such a high profile hedge fund manager built a significant stake (9.5%) and took an activist role (something he rarely does) to push for a change and more protection for TERP shareholders. It really looked like the older brother trying to protect the younger one from bullies. The market appreciated and I recovered all my confidence in the stock and the investment thesis. The third important announcement was the revision of the Vivint acquisition . I am not sure how much weight Tepper’s letter had in the revision but that was clearly another positive. The change in the terms was not massive (the price was reduced 13% or $123 mln) while the reduction in the commitment on future purchases was more significant, with positive elements such as the downward price adjustment to achieve minimum returns. Overall I would say this was a positive but not “massively” positive. Stock reaction The following chart shows the stock performance since my previous article: TERP data by YCharts As you can see there has been a lot of volatility and a dramatic recovery during the month of December. This recovery was exclusively newsflow driven as many stocks in the energy yieldco space suffered significant losses during the same period of time (KMI comes to mind). Change to the investment thesis At the time of my previous post Terraform Power was extremely unloved and panic was pushing investors out. It was trading around book value pre minorities and had a yield of 16.8%. At the moment the stock is trading significantly above book value and on a yield of 11.3%. I believe there is still some value in the stock but it is not such a compelling story anymore. I believe upside from here in the short term is limited, especially if we consider that, while the stock went up 55%, credit markets deteriorated further in December, putting a lot of pressure and scrutiny on highly leveraged balance sheets. As a result I believe it is time to cash out and wait for better opportunities to arise. Scalper1 News
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