Howard D. Punch of Punch and Associates presented his in-depth investment thesis on B. Riley Financial (Nasdaq: RILY) at Best Ideas 2018.
B. Riley is an uncovered financial conglomerate led by a sharp capital allocator who owns 17% of the company and has been buying sizeable amounts of stock in the open market at recent levels. The company reports in three segments, including the namesake small-cap broker-dealer, an appraiser and liquidator of retail inventory, and its principal investing segment, which owns old-tech telecom assets. CEO Bryant Riley operates the company as a believer in the adage “there is no such thing as bad assets, just bad prices”. The businesses are complementary, as they potentially provide offsetting cyclicality, and strong cash flow generation serves as a funding source for opportunistic M&A. The retail liquidation business is a beneficiary of the disruption caused by e-commerce. Recently, the company acquired two broker-dealers (FBR and Wunderlich Securities) at attractive valuations. Through shrewd cost-cutting, the breakeven point for these businesses was substantially reduced, and their growth engines should benefit within a larger enterprise. The company has a policy of paying regular and special dividends equal to 25% of EBITDA (3.7% LTM yield). With a sum-of-the-parts valuation above $26 per share and a net cash balance sheet, Howard believes the risk/reward in RILY shares is compelling at $18 per share.
About the instructor:
Howard Punch directs all research and investment initiatives at Punch & Associates. Howard honed his investment management skills the old fashioned way: by making a lot of mistakes. Starting his career in the early 80’s at Merrill Lynch in NYC and then as a retail guy in Minneapolis, it was normal practice to call clients with one stock at a time, state the case for owning it and hope for the best. Win, lose or draw, each pick would have to be re-visited with each client. The end result was a deep respect for risk, a large dose of humility and a risk-averse investment approach that anticipates what could go wrong before fantasizing about what could go right. After spending nearly 19 years at Merrill Lynch, Howard started Punch & Associates in 2002. A hopeless research addict and devout student of behavioral finance, Howard actively researches market anomalies and inefficiencies. Howard resides in Eagan, MN with his wife, Julie. He is a Magna Cum Laude graduate of Carleton College.
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