Revisiting B. Riley – Insider Weekends

B. Riley Financial, Inc. (RILY) is a company that we’ve followed for years and written about many times before, initially highlighting it in our September 2020 Special Situations Newsletter, and watching as the company’s stock went up by over 200%. Over time, we scaled back our B. Riley position, not due to concerns surrounding the company, but in order to free up capital for our April 2022 mid-month opportunity. We revisited B. Riley more recently after a short-seller report, and wrote the following in our February 2023 mid-month update:

The primary thesis of the Wolfpack Research report is that B. Riley’s portfolio of securities was significantly impacted in 2022 and that they believe that the company will report investment losses of up to $700 million in 2023, putting its dividend at risk and a potential collapse of the company. The firm relied on the company’s recent 13F filling to draw some of those conclusions.

There are a couple of issues with this approach. The 13F filing and its associated table of positions that you can view on EDGAR, only includes about $460 million of B. Riley’s positions and not the full $1.3 billion securities portfolio. The second issue is the performance of this portfolio and the expected performance in 2023.

While B. Riley took a large hit in 2022 on its investment portfolio and the kind of companies it holds are not the kind I would personally consider investing in, many of these companies have rebounded strongly off their lows and are up significantly so far this year both due to the January effect and the current market rally in anticipation of a soft landing. I reviewed every company on the 13F list where RILY holds a position of over $1 million and a majority of them have performed well year-to-date.

Ultimately, we found a plethora of issues with the short-seller report and chose not to scale back our position in B. Riley either in our personal portfolio or the model portfolio. However, as always, we recommend each individual investor take a closer look at the actual report and draw their own conclusions. What we did find interesting about the whole situation was not the short-seller report itself, but how B. Riley chose to deal with the situation, stating:

It is good to see that instead of attacking the credibility of the short seller, as some companies unfortunately tend to do, B. Riley’s insiders quietly stepped up their insider purchases and the stock is almost back to where it was before the short seller report was released.

After a question about B. Riley from a subscriber and continued purchases by the company’s insiders (including Bryant R. Riley), we figured we’d revisit the company once more – especially considering that the stock price has dropped to around $26, around the same price we initially purchased the company back in September 2020. While it was true that B. Riley stock recovered quickly after the short-seller report, when the company released Q4 and full-year 2022 results on February 22nd, the stock fell once more and has continued to perform poorly given concerns about financial institutions after what happened to both Silicon Valley Bank and Credit Suisse.

Fiscal results for Q4 2022 were  understandably poor, especially considering how market conditions have impacted their securities portfolio and B. Riley’s core businesses as a mid-market investment bank.  Total revenues for the year decreased by $474.0 million from the previous year to $1.08 billion for the fiscal year ended December 31, 2022. Much of this was related to lower revenue from fees and services, as well as decreases in the value of their securities portfolio. However, interest income from loans and securities did increase by $122.7 million to $245.4 million for the year. Some of this has to do with the company acquiring portfolios of accounts receivables and collecting against it. Bryant Riley discussed this in the Q4 conference call and mentioned:

In addition, we added to our receivables portfolio. This has been a great investment that continues to perform with double-digit rates of return. Since our unlevered purchase of the first portfolio for $400 million, and as of yesterday, we have recovered approximately $395 million of cash and have an incremental $154 million of current receivables.
We typically recover 78% of our receivables per month. The second portfolio that we purchased in partnership with Pathlight Capital is performing in line with our expectations, and we expect to have an IRR in excess of 40%.

Direct costs for the year increased slightly, but total selling, general and administrative decreased by roughly 21%. Overall, the company recorded a net loss of $167.8 million attributable to shareholders, which stood in stark contrast to the net income of $437.6 million from the year prior. Free cash flow was fairly small (around $10 million) for the year, but was still positive, and the poor fiscal results were related to market conditions. It was disappointing to see the company’s wealth management division shrink sharply.

Looking at the company’s Q4 investor presentation, we get a closer look at how the year has treated B. Riley in terms of operating revenue and EBITDA – and are comforted to see that operating EBITDA for the last two quarters is returning to Q4 2021 levels. The company did not slow down its acquisitions in 2022 and this helped operating revenue increase significantly in Q4 2022. Continued investments on the operating side of the company coupled with the continued purchases by insiders of the company (despite the large drop in stock price and poor results) does seem to be a good sign.

The company also seems to show no signs of slowing down on acquisitions, as earlier this month, Synchronoss Technologies (SNCR) received an offer from B. Riley to acquire all outstanding shares of the company’s common stock for a price of $1.15 per share, payable in cash, and deal details can be found through our Potential New Deal Alert.

The company is also expanding its restructuring business. We discussed the acquisition of restructuring firm FocalPoint last year and B. Riley has continued expanding in that segment by acquiring the corporate division of Toronto-based business advisory firm Farber Group.

While there are still some concerns surrounding B. Riley’s unsecured bonds and the quality of the assets in their securities portfolio, we believe those concerns weren’t enough to warrant such a steep drop in B. Riley’s stock price. Q1 2023 results are likely to be good because of the rebound in the market. B. Riley is a business that we’ve consistently come back to, and if market conditions improve, we may revisit the company once more. For now though, we won’t be adding to or reducing our stake of B. Riley either in our personal or model portfolio.

Welcome to edition 675 of Insider Weekends. Insider buying decreased significantly last week with insiders purchasing $148.39 million of stock compared to $649.7 million in the week prior. Selling also decreased to $1.13 billion compared to $1.75 billion in the week prior.

Sell/Buy Ratio: The insider Sell/Buy ratio is calculated by dividing the total insider sales in a given week by total insider purchases that week. The adjusted ratio for last week dropped to 7.6. In other words, insiders sold almost 8 times as much stock as they purchased. The Sell/Buy ratio this week was favorable compared to the prior week when the ratio stood at 10.44.

Notable Insider Buys:

1. Vitesse Energy, Inc. (VTS): $17.1

Shares of this oil and gas exploration and production company were acquired by 3 insiders:

• Director Joseph S. Steinberg acquired 200,000 shares, paying $16.98 per share for a total amount of $3.39 million. Mr. Steinberg increased his stake by 69.68% to 487,047 shares with this purchase.
• Chief Executive Officer Robert W. Gerrity acquired 10,000 shares, paying $16.75 per share for a total amount of $167,500. These shares were purchased indirectly through a trust.
• President Brian Cree acquired 3,000 shares, paying $16.75 per share for a total amount of $50,250. Mr. Cree increased his stake by 0.41% to 729,000 shares with this purchase.

You can view the list of recent insider transactions for Vitesse Energy, Inc. here.

2. Hippo Holdings Inc. (HIPO): $15.11

Director Noah Knauf acquired 208,531 shares of this home protection insurance provider, paying $14.43 per share for a total amount of $3 million. These shares were purchased indirectly through a trust.

You can view the list of recent insider transactions for Hippo Holdings Inc. here.

3. Alliance Resource Partners, L.P. (ARLP): $19.26

President and Chief Executive Officer Joseph W. Craft III acquired 148,741 shares of this diversified natural resource company, paying $18.49 per share for a total amount of $2.75 million. Mr. Craft increased his stake by 0.80% to 18,631,398 shares with this purchase.

You can view the list of recent insider transactions for Alliance Resource Partners, L.P. here.

4. Enovix Corporation (ENVX): $11.24

Director Thurman J. Rodgers acquired 172,156 shares of this battery technology company, paying $11.29 per share for a total amount of $1.94 million. These shares were purchased indirectly through a trust.

You can view the list of recent insider transactions for Enovix Corporation here.

5. B. Riley Financial, Inc. (RILY): $26.96

Shares of B. Riley Financial were acquired by 3 insiders:

• Chairman and Co-CEO Bryant R. Riley acquired 25,000 shares, paying $29.90 per share for a total amount of $747,463. Mr. Riley increased his stake by 0.38% to 6,620,631 shares with this purchase.
• Director Robert L. Antin acquired 18,000 shares, paying $30.22 per share for a total amount of $543,898. Mr. Antin increased his stake by 70.59% to 43,498 shares with this purchase.
• Director Randall E. Paulson acquired 10,000 shares, paying $29.90 per share for a total amount of $298,991. Mr. Paulson increased his stake by 3.43% to 301,899 shares with this purchase.

You can view the list of recent insider transactions for B. Riley Financial, Inc. here.

You can view the full list of purchases from this Insider Buying page.

Notable Insider Sales:

1. Walmart Inc. (WMT): $141.8

Shares of Walmart were sold by 3 insiders:

• Director Robson S. Walton sold 5,053,780 shares for $141.01, generating $712.62 million from the sale. These shares were sold indirectly by a trust.
• President and CEO Douglas C. McMillon sold 9,716 shares for $140.12, generating $1.36 million from the sale.
• Executive Vice President John R. Furner sold 4,375 shares for $140.05, generating $612,719 from the sale.

You can view the list of recent insider transactions for Walmart Inc. here.

2. Apple Inc. (AAPL): $160.25

COO Jeffrey E. Williams sold 187,730 shares of Apple for $159.76, generating $29.99 million from the sale.

You can view the list of recent insider transactions for Apple Inc. here.

3. Atlassian Corporation (TEAM): $152.72

Co-CEO, Co-Founder Michael Cannon-Brookes sold 43,070 shares of this software application company for $153.27, generating $6.6 million from the sale. These shares were sold indirectly by a trust.

You can view the list of recent insider transactions for Atlassian Corporation here.

4. CrowdStrike Holdings, Inc. (CRWD): $131.54

Shares of this cloud-delivered protection provider were sold by 5 insiders:

• President and CEO George Kurtz sold 58,720 shares for $134.75, generating $7.91 million from the sale.
• Chief Financial Officer Burt W. Podbere sold 16,615 shares for $133.30, generating $2.21 million from the sale.
• Chief Security Officer Shawn Henry sold 10,462 shares for $131.85, generating $1.38 million from the sale.
• President Michael Sentonas sold 7,926 shares for $131.85, generating $1.05 million from the sale.
• Chief Accounting Officer Anurag Saha sold 845 shares for $131.85, generating $111,413 from the sale.

You can view the list of recent insider transactions for CrowdStrike Holdings, Inc. here.

5. Amylyx Pharmaceuticals, Inc. (AMLX): $28.74

Shares of this biotech company were sold by 5 insiders:

• Co-Chief Executive Officer Justin B. Klee sold 100,000 shares for $31.86, generating $3.19 million from the sale.
• Chief Medical Officer Patrick D. Yeramian sold 54,627 shares for $31.87, generating $1.74 million from the sale.
• Director George M. Milne Jr. sold 35,000 shares for $31.89, generating $1.12 million from the sale.
• Chief Financial Officer James M. Frates sold 32,500 shares for $31.89, generating $1.04 million from the sale.

You can view the list of recent insider transactions for Amylyx Pharmaceuticals, Inc. here.

You can view the full list of sales from this Insider Sales page.

Disclaimer: I hold long positions in B. Riley (RILY) and Atlassian (TEAM). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.