Sunrun Attracts a Short Seller — Maneuver, Explained

Investigative research firm and short seller Muddy Waters Research, founded by the mysterious Carson Block, announced it took out a short position against solar company Sunrun Inc. (RUN).

The move has prompted a swift rally from public market investors juxtaposing the position, likely due to lingering negative sentiment of short selling from the infamous GameStop era. Is the short position valid or a product of dismissable claims?

In a publication in late July, Muddy Waters announced it was short RUN stock due to the outcome of its research. The firm wrote, “We see it as an uneconomic business built on three shaky pillars.” Those three pillars, the firm wrote, are:

• The equity story of exaggerated Subscriber Values and Gross / Net Earning Assets

• Funding growth through abusing tax incentives

• Issuing [asset-backed securities] that could be exposed to a RUN bankruptcy

Muddy Waters said the company and its stock could falter if one of these pillars stumbles. From funding gaps to equity issuances for growth, this could create a capital risk for shareholders.

The firm added, “Insiders have already become ultra-wealthy, having net sold shares since July 2020 for $205.9 million.”

Muddy Waters takes short and long positions depending on the outcome of its investigative research on a particular company. Because it isn't driven solely by short positions, its research is more credible than other firms of similar scope.

Still, it’s worth looking into the firm’s claims. As it sits with a mildly high short percentage of float (17.10 percent as of August 2), Muddy Waters claims Sunrun is operating on its third CFO since 2020. To fact check this, Danny Abajian took the position in May, following Tom vonReichbauer in May 2020. It’s possible Muddy Waters is referring to an interim CFO for the third, which lessens the drama of the claim.

As for the claim about “funding growth through abusing tax incentives,” Sunrun had a response. The solar company said, “The premise of Muddy Waters' argument is that claiming tax credits based on fair market value is inappropriate under IRS Section 25D. However, like all companies, Sunrun and its affiliates claim credits under Section 48. Only individuals claim tax credits under Section 25D the rules for which differ greatly from Section 48.”

It’s worth noting the solar industry is in an unprecedented squabble as the White House investigates materials imports from certain Southeast Asian countries over suspected sanction hopping. This could be impacting the Sunrun financial metrics that Muddy Waters cites.

Ultimately, the short position may not be unfounded in part, but the severity could be tampered with to promote a bearish agenda. It’s best to consider bias when consuming any type of market lead. Meanwhile, RUN's stock history is quite volatile, particularly since a January 2021 peak (which just so happens to be the same time as the epic GME short squeeze).

RUN stock jumped as much as 5 percent in the early hours of Aug. 2. Since Muddy Waters released its position, the shares are up about 32 percent. RUN remains 11.33 percent in the red YTD, which means short squeezers have their work cut out for them.