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Exiting B. Riley Common Stock – Insider Weekends

  • November 19, 2023

B. Riley Financial Inc. (RILY): $21.87

Market Cap: $674.05 M

Key Insights

  • Franchise Group (FRG), a company that owns businesses like The Vitamin Shoppe, Pet Supplies Plus, Sylvan Learning, Buddy’s Home Furnishings, etc. was taken private by its CEO Brian Kahn in August 2023 in an all cash deal worth $2.8 billion.
  • B. Riley invested $216.5 million of new capital in the deal and has 31% voting interest in FRG.
  • John Hughes, a co-founder of Prophecy Asset Management pled guilty to defrauding clients of $294 million. Mr. Hughes has named Brian Kahn as a co-conspirator.
  • Brian Kahn has not been charged yet and denied any involvement in the fraud at his prior firm. B. Riley reiterated their confidence in FRG’s prospects, going so far as to indicate they would have purchased the full company.
  • B. Riley’s stock is down nearly 43% over the last month.

This has been a difficult year for the mid-market investment firm B. Riley (RILY). Mark-to-market losses on its equities portfolio, which mostly consisted of small cap stocks and often not the most financially stable ones, had caused the company to report losses in three out of four quarters in 2022. It did not help that this was followed by a short report by Wolfpack Research in February 2023.

In our February 2023 mid-month update, I addressed that short report and wrote the following:

I have a lot of respect for short sellers. They often swim against the current, tend to do very detailed analysis and expose fraud. I also do not find the fact that they establish a short position, publish the report and hope to make a profit from the ensuing drop in the stock price as particularly worrisome. There is an element of front running in this approach but long-only managers and analysts talk their book all the time as well. To avoid this aspect of front-running, for the vast majority of positions discussed in our monthly newsletters or mid-month updates, I establish a position in my personal portfolio after the newsletter or update are published.

Not all research published by short sellers is created equal in terms of the quality and depth of work. Near the top, in terms of track record and quality, are Muddy Waters and Hindenburg Research as well as long/short hedge fund managers like Jim Chanos of Kynikos Associates and John Hempton of Bronte Capital Management. They don’t get all their short ideas right but they have exposed some of the largest frauds in corporate history ranging from Chinese reverse merger companies to Enron and more recently, Adani Group. I have also found certain reports like the one about Teavana in 2012, while Starbucks was in the process of acquiring the company, not credible. It is important to dig into each report and analyze it in detail to draw your own conclusions.

To make sure I was not biased in my opinion about Wolfpack Research’s short report on B. Riley, I asked Frank Moneymaker to take an independent look at the report and both of us came to similar conclusions that the primary thesis of the report was flawed. I encourage you to download the full report and read it, to come to your own independent conclusions.

Incidentally, after 38 years in business, Jim Chanos decided to wind down his firm last week and return assets by the end of the year. Assets has shrunk from a peak of $8 billion in 2008 to under $200 million this year. Getting back to my short report rebuttal from earlier this year, I went on to write,

Primary Thesis 

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.

The other part that Wolfpack misses is that B. Riley, in anticipation of the turn in the business cycle, acquired an investment bank call FocalPoint Securities in January 2022 that focuses on restructuring and special situations. B. Riley will lend to companies that may eventually go bankrupt as part of a “loan-to-own” strategy. The company has acquired brands in bankruptcy prior to the FocalPoint acquisition and has also acquired entire companies that had declining revenue but were generating an adequate amount of free cash flow.

Telecom Assets

This brings me to another point in the Wolfpack report that I did not find credible. The report discusses the $200 million in goodwill that RILY has on its balance sheet due to the “disastrous rollup of (near obsolete) dialup internet companies over the last five years”. RILY was not acquiring these companies because it was expecting magicJack to make some sort of an epic comeback but because these companies were cheap and were generating a good amount of free cash flow.

Conclusion

I could go on about various other aspects of the report including the fact that it focuses primarily on investment losses and does not discuss the profits B. Riley generates from its operating businesses but you get the point. 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. I am concerned about the quality of assets in B. Riley’s portfolio and if that gives you pause, you should consider reducing exposure until it is at a level that lets you sleep at night. At this point I am not making any changes to our poistion in B. Riley either in the model portfolio or my personal portfolio.

The stock remained under pressure following that short report and at one point dipped as low as $25 before rebounding and reaching a peak of almost $60 by late July 2023 as some of those mark-to-market losses reversed in Q4 2022 and Q1 2023.

While I had a lot of confidence in the company since we started a position after writing about it in our September 2020 Special Situations newsletter, my confidence has eroded in recent months and this FRG situation gave me pause. To be clear, I think the direct impact on B. Riley from this FRG situation is small but the perception is negative and sometimes perception becomes reality.

There have been a string of actions that paint a picture of a company that is both opportunistic and willing to go far out on the risk spectrum. Involvement in the SPAC bubble as a sponsor and acting as the sole bookrunner for Bed, Bath & Beyond’s secondary offering two months before the company declared bankruptcy, raised eyebrows.

Colin King, of Value Don’t Lie, wrote an excellent “short” rebuttal today and I encourage you to check out his work here. He is more optimistic than I am about B. Riley at this juncture but I agree with him that the company needs to eliminate its dividend. I think the stock is going to remain under pressure in the near-term even if things work out in the long-term. I decided to exit the position in my personal portfolio and will be closing it out in our model portfolio as well.

While it looks like we will take a 18.41% loss on our position, which was started it at a price of $26.78 per share, the fact that the company paid out $10 per share in special dividends and $10.875 in regular dividends since we purchased shares, implies that we have come out significantly ahead on the investment despite the recent pullback. The model portfolio also benefited from us exiting a portion of the position in April 2022 for a gain of 112.55% to make room for new investments.

Welcome to edition 708 of Insider Weekends. Insider buying increased last week with insiders purchasing $119.14 million of stock compared to $110.16 million in the week prior. Selling increased significantly to $2.51 billion compared to $860.26 million 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 the total insider purchases that week. The adjusted ratio for last week went up to 29.46. In other words, insiders sold more than 29 times as much stock as they purchased. This week, the Sell/Buy ratio was favorable, compared to the prior week when the ratio stood at 7.81.

Notable Insider Buys:

1. Air Products & Chemicals Inc. (APD): $269.99

Chairman, President, and CEO Seifi Ghasemi acquired 11,000 shares of this atmospheric gases company, paying $264.42 per share for a total amount of $2.91 million. Mr. Ghasemi increased his stake by 1.67% to 670,673 shares with this purchase.

You can view the list of recent insider transactions for Air Products & Chemicals Inc. here.

P/E: 27.44Forward P/E: N/AIndustry P/E: 16.54
P/S: 4.76Price/Book: 3.9EV/EBITDA: 15.58
Market Cap: $59.98BAvg. Daily Volume: 1,260,53152 Week Range: $251.63 – $320.91

2. Intel Corp. (INTC): $43.81

Director Lip-Bu Tan acquired 66,000 shares of Intel, paying $37.84 per share for a total amount of $2.49 million. These shares were purchased indirectly through a trust.

You can view the list of recent insider transactions for Intel Corp. here.

P/E: -111.5Forward P/E: N/AIndustry P/E: 24.90
P/S: 3.49Price/Book: 1.74EV/EBITDA: 32.78
Market Cap: $184.70BAvg. Daily Volume: 43,932,42352 Week Range: $24.19 – $43.81

3. GrowGeneration Corp (GRWG): $2.74

Shares of this retail hydroponic and organic gardening store chain were acquired by 2 insiders:

  • CEO Darren Lampert acquired 496,000 shares, paying $2.00 per share for a total amount of $993,868. Mr. Lampert increased his stake by 59.25% to 1,333,120 shares with this purchase.
  • President Michael Salaman acquired 430,000 shares, paying $2.29 per share for a total amount of $983,105. Mr. Salaman increased his stake by 53.08% to 1,240,075 shares with this purchase.

You can view the list of recent insider transactions for GrowGeneration Corp here.

P/E: -4.91Forward P/E: N/AIndustry P/E: 15.83
P/S: 0.73Price/Book: 0.84EV/EBITDA: -10.4
Market Cap: $167.99MAvg. Daily Volume: 834,99952 Week Range: $1.77 – $8.63

4. Ameresco Inc. (AMRC): $28.94

Shares of this clean technology integrator were acquired by 2 insiders:

  • President and CEO George P. Sakellaris acquired 65,000 shares, paying $24.40 per share for a total amount of $1.59 million. Mr. Sakellaris increased his stake by 6.34% to 1,090,000 shares with this purchase. 15,000 of these shares were purchased indirectly through a trust.
  • Executive Vice President Nicole E. Bulgarino acquired 15,000 shares, paying $22.40 per share for a total amount of $336,000. Ms. Bulgarino increased her stake by 92.98% to 31,133 shares with this purchase.

You can view the list of recent insider transactions for Ameresco Inc. – Class A here.

P/E: N/AForward P/E: N/AIndustry P/E: 20.82
P/S: 0.78Price/Book: 1.68EV/EBITDA: 24.67
Market Cap: $990.75MAvg. Daily Volume: 865,35752 Week Range: $18.4 – $68.75

5. B. Riley Financial Inc (RILY): $21.87

Shares of B. Riley Financial were acquired by 6 insiders:

  • Director Robert L. Antin acquired 35,000 shares, paying $24.21 per share for a total amount of $847,450. Mr. Antin increased his stake by 76.93% to 80,495 shares with this purchase.
  • Chairman and Co-CEO Bryant R. Riley acquired 30,000 shares, paying $21.23 per share for a total amount of $636,858. Mr. Riley increased his stake by 0.44% to 6,778,773 shares with this purchase.
  • Director Randall E. Paulson acquired 10,000 shares, paying $21.23 per share for a total amount of $212,292. Mr. Paulson increased his stake by 3.24% to 318,979 shares with this purchase.
  • Director Agostino D. Robert acquired 5,000 shares, paying $21.23 per share for a total amount of $106,143. Mr. Robert increased his stake by 3.21% to 160,570 shares with this purchase.
  • Director Tamara Sue Brandt acquired 1,635 shares, paying $30.64 per share for a total amount of $50,093. Ms. Brandt increased her stake by 35.86% to 6,195 shares with this purchase.
  • Director Renee E. Labran acquired 880 shares, paying $22.63 per share for a total amount of $19,912. Ms. Labran increased her stake by 15.63% to 6,510 shares with this purchase.

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

P/E: -8.28Forward P/E: N/AIndustry P/E: 9.73
P/S: 0.37Price/Book: 1.33EV/EBITDA: 10.37
Market Cap: $668.85MAvg. Daily Volume: 1,224,93952 Week Range: $16.65 – $58.45

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

Notable Insider Sales:

1. Airbnb Inc (ABNB): $127.15

Shares of Airbnb were sold by 3 insiders:

  • Director Joseph Gebbia sold 499,999 shares for $125.35, generating $62.67 million from the sale.
  • Chief Strategy Officer Nathan Blecharczyk sold 40,000 shares for $121.50, generating $4.86 million from the sale.
  • Director Jeffrey D. Jordan sold 2,000 shares for $130.00, generating $260,000 from the sale. These shares were sold indirectly by a trust.

You can view the list of recent insider transactions for Airbnb Inc – Class A here.

P/E: 15.81Forward P/E: N/AIndustry P/E: 15.83
P/S: 8.51Price/Book: 9.02EV/EBITDA: 26.24
Market Cap: $81.68BAvg. Daily Volume: 6,239,09552 Week Range: $81.91 – $154.95

2. Meta Platforms Inc (META): $335.04

Shares of Meta Platforms were sold by 6 insiders:

  • COB and CEO Mark Zuckerberg sold 140,045 shares for $329.26, generating $46.11 million from the sale. These shares were sold indirectly by a trust.
  • Chief Financial Officer Susan J. Li sold 28,302 shares for $331.81, generating $9.39 million from the sale. 6,734 of these shares were sold as a result of exercising options immediately prior to the sale.
  • Chief Technology Officer Andrew Bosworth sold 18,954 shares for $331.47, generating $6.28 million from the sale. 6,080 of these shares were sold as a result of exercising options immediately prior to the sale.
  • President, Global Affairs Nicholas Clegg sold 9,421 shares for $330.74, generating $3.12 million from the sale. 4,324 of these shares were sold as a result of exercising options immediately prior to the sale.
  • Chief Operating Officer Javier Olivan sold 7,634 shares for $336.31, generating $2.57 million from the sale. 3,192 of these shares were sold as a result of exercising options immediately prior to the sale.
  • Chief Legal Officer Jennifer Newstead sold 566 shares for $329.10, generating $186,271 from the sale. These shares were sold as a result of exercising options immediately prior to the sale.

You can view the list of recent insider transactions for Meta Platforms Inc – Class A here.

P/E: 29.62Forward P/E: N/AIndustry P/E: 17.46
P/S: 7.1Price/Book: 6.03EV/EBITDA: 19.1
Market Cap: $901.26BAvg. Daily Volume: 22,230,55452 Week Range: $108.32 – $338.4

3. Salesforce Inc (CRM): $221.22

Shares of this cloud software company were sold by 3 insiders:

  • Co-Founder and CTO Parker Harris sold 126,808 shares for $220.14, generating $27.92 million from the sale. These shares were sold as a result of exercising options immediately prior to the sale.
  • Chair and CEO Marc Benioff sold 75,000 shares for $217.58, generating $16.32 million from the sale.
  • Pres/Chief Engineering Officer Srinivas Tallapragada sold 10,000 shares for $212.86, generating $2.13 million from the sale. These shares were sold as a result of exercising options immediately prior to the sale.

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

P/E: 139.13Forward P/E: N/AIndustry P/E: 24.90
P/S: 6.51Price/Book: 3.71EV/EBITDA: 34.34
Market Cap: $215.25BAvg. Daily Volume: 4,247,05352 Week Range: $126.34 – $238.22

4. Crowdstrike Holdings Inc (CRWD): $207.09

Shares of this cloud-delivered protection provider were sold by 3 insiders:

  • Director Godfrey Sullivan sold 150,000 shares for $200.06, generating $30 million from the sale.
  • Chief Financial Officer Burt W. Podbere sold 30,500 shares for $200.00, generating $6.1 million from the sale.
  • Director Sameer K. Gandhi sold 15,000 shares for $200.06, generating $3 million from the sale.

You can view the list of recent insider transactions for Crowdstrike Holdings Inc – Class A here.

P/E: -532.5Forward P/E: N/AIndustry P/E: 24.90
P/S: 17.72Price/Book: 26.26EV/EBITDA: 539.23
Market Cap: $46.82BAvg. Daily Volume: 2,611,44552 Week Range: $92.25 – $210.09

5. SBA Communications Corp (SBAC): $233.71

Shares of this leading independent owner and operator of wireless communications infrastructure were sold by 3 insiders:

  • Chief Executive Officer & President Jeffrey Stoops sold 159,750 shares for $229.69, generating $36.69 million from the sale. 45,770 of these shares were sold indirectly by Calculated Risk SBA Holdings, LLC.
  • Director Kevin L. Beebe sold 1,500 shares for $233.83, generating $350,744 from the sale.
  • EVP – Operations Mark R. Ciarfella sold 1,000 shares for $217.62, generating $217,620 from the sale.

You can view the list of recent insider transactions for SBA Communications Corp – Class A here.

P/E: 51.48Forward P/E: N/AIndustry P/E: 26.69
P/S: 9.26Price/Book: -4.9EV/EBITDA: 23.18
Market Cap: $25.21BAvg. Daily Volume: 985,00252 Week Range: $183.88 – $304.3

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

The list of all insider purchases and sales by management people is only available to InsideArbitrage Premium and Plus members.

Disclaimer:  I hold a long position in Meta (META). 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.