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Margaret Moran
Margaret Moran
Articles (348) 

Philippe Laffont Takes a Shine to Sunrun

Coatue Management takes a new stake in the solar energy company

October 19, 2020 | About:

Coatue Management, the firm led by former tiger cub Philippe Laffont (Trades, Portfolio), recently disclosed that it has established a stake in solar energy company Sunrun Inc. (NASDAQ:RUN).

According to GuruFocus Real-Time Picks, a Premium Feature, the guru bought 17,656,319 shares of the company on Oct. 8, giving the stock a 9.8% weight in the equity portfolio. Shares traded for an average price of $70.54 that day.

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Founded in 1999 and headquartered in New York, Coatue Management is an employee-owned private hedge fund sponsor. It launches and manages various hedge funds for clients and is perhaps best known for its tech-focused hedge fund. The firm mainly invests in U.S. and non-U.S. publicly traded equity securities, but it also has short positions and investments in private equity and hedging markets. Chief Investment Officer Philippe Laffont (Trades, Portfolio), who founded the firm after leaving Tiger Management, takes a top-down approach to stock picking and focuses on the information technology sector.

Sunrun investment

Based in San Francisco, Sunrun is the leading home solar panel and battery storage company in the U.S. It provides solar panels, batteries, installation, education and other solar power equipment and services through both rental and purchase agreements to residential homeowners in 23 U.S. states, including California, New York, Massachusetts, Florida and Texas.

Laffont's firm now owns approximately 9% of Sunrun's total shares outstanding. The only guru with a bigger stake is Chase Coleman (Trades, Portfolio) with 9.94% of shares outstanding, though Coleman has been cutting back on his position in the past few weeks, as shown in the chart below:

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It comes as no surprise that we are seeing more activity than usual in solar energy stocks in general and Sunrun in particular. There are two main drivers behind the renewed interest in buying and selling the stock.

The first is that Sunrun completed its acquisition of Vivint Solar on Oct. 8, solidifying its position as the industry leader in the U.S. Vivint's stock has ceased trading under the VSLR ticker. Vivint shareholders received 0.55 shares of Sunrun common stock for each one of their Vivint shares.

Sunrun CEO Lynn Jurich had the following to say in the announcement:

"Together, we will provide affordable, reliable and clean electricity at an exciting new scale. With our compelling services, millions of homeowners will rewire their homes with solar and batteries to enjoy enhanced comfort and affordability. The combined company benefits from broad market reach and differentiated consumer offerings. A lower cost structure from greater scale will accelerate the transition away from polluting and unreliable fossil fuels."

The second factor is that, on Oct. 12, the White House announced that over the weekend, President Trump issued a proclamation that his administration plans to impose tariffs on imported solar panels, which will begin at 15% and increase to 18%. The tax will apply to previously exempt bifacial solar panel imports.

It should be noted that, while the tax is ostensibly to protect U.S. jobs, the reality is that the vast majority of solar panels are produced outside the U.S., even the ones that are sold by U.S. companies like Sunrun. U.S. companies often outsource much of their production to other countries due to labor and other costs, and this is not likely to change even with the tariffs. The costs will most likely be absorbed by the companies or passed on to consumers.

Triggered by these big changes, shares of Sunrun have dropped approximately 20% since the beginning of the month to trade around $62.66 on Oct. 19. This marks the first major selloff of the stock since it began an astonishing bull run at the end of March, when stocks in certain sectors began to recover from the Covid-19 selloff in February. Between the end of March (the end of the market Covid-19 stock market crash) and the beginning of October (when the tariffs were announced), the stock gained more than 856%.

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Given the timing of Laffont's buy, it appears the decision to purchase Sunrun stock was more likely due to the expectation that the company will continue to grow after the Vivint acquisition. Additionally, the guru's firm already owned shares of Vivint before it was acquired by Sunrun; the 11,627,907-share holding represented 2.6% of the equity portfolio.

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GuruFocus gives Sunrun a financial strength rating of 2 out of 10 and a profitability rating of 4 out of 10. The cash-debt ratio of 0.1 is lower than 93.99% of other companies in the semiconductors industry, while the Altman Z-Score of 1.61 indicates the company could be in danger of bankruptcy within the next two years. The operating margin of -29.98% shows that the company's operations are not yet profitable. While revenue has been steadily increasing, earnings per share has declined back to the negatives in recent years.

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Other investments

At the end of the second quarter, the equity portfolio consisted of common stock positions in 88 companies valued at a total of $11.37 billion. Since then, Laffont's firm has made some big moves, including the Sunrun buy and a new stake in real-time engagement platform Agora Inc. (NASDAQ:API), which was purchased on June 30 and impacted the equity portfolio by 17.34%.

In terms of sector weighting, the firm was most invested in communication services, technology and consumer cyclical.

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Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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