BlueLinx insiders bought after BXC’s price was cut in half over two days. Is smart money signaling a bargain?

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BlueLinx insiders bought after their company’s stock price was cut in half after a surprise revenue decline.

On Nov. 5, BXC closed at $31. Then came an earnings report showing a significant revenue decline. On Thursday morning BlueLinx (BXC) traded as low as $13.47 before rebounding to close at $15.96. Is the business of the wholesale wood supplier really worth half of what it was just 2 days ago? The buying by BlueLinx insiders suggests the selling may be overdone.

In response to BXC’s drop, two BlueLinx insiders made purchases. President and CEO Mitchel Lewis disclosed bought 11,900 BXC at $15.81. Bluelinx Chief Administrative Officer Shyam Reddy bought 5500 shares at $18.21. Both Form 4’s were filed mid-day on Thursday — the same day as the trades. Obviously the officers wanted to show support for the stock. An examination of Lewis’ open market purchases of BXC shows him to be an opportunistic buyer, who has timed his purchases well in the past.

BlueLinx CEO Mitchel Lewis insider buying history

Filing DateCompanyTickerTransactionTrade Date Shares  Avg. Price  Total Return
07-Nov-2019Bluelinx Holdings Inc.BXCMarket Purchase07-Nov-2019         11,900                  15.81  $      188,128
23-Aug-2019Bluelinx Holdings Inc.BXCMarket Purchase22-Aug-2019           1,200                  26.99  $        32,388
14-Nov-2018Bluelinx Holdings Inc.BXCMarket Purchase12-Nov-2018           1,941                  23.98  $        46,545 33.94%
13-Nov-2018Bluelinx Holdings Inc.BXCMarket Purchase09-Nov-2018           1,962                  24.49  $        48,040 31.18%
14-Nov-2017Bluelinx Holdings Inc.BXCMarket Purchase10-Nov-2017           8,000                    8.60  $        68,800 273.50%
13-Nov-2017Bluelinx Holdings Inc.BXCMarket Purchase10-Nov-2017           4,000                    8.55  $        34,200 275.69%
22-May-2014Bluelinx Holdings Inc.BXCMarket Purchase22-May-2014         10,000                    1.25  $        12,450 162.27%
22-May-2014Bluelinx Holdings Inc.BXCMarket Purchase20-May-2014         22,368                    1.25  $        27,960 161.22%
21-May-2014Bluelinx Holdings Inc.BXCMarket Purchase19-May-2014         10,000                    1.28  $        12,800 155.10%

For the 3rd quarter, BlueLinx reported net sales of $679 million compared to $860 milliion in the 3rd quarter of last year. The company attributed the shortfall to a “significant decline in siding product sales due to the loss of a key product brand and lingering transaction-related sales dis-synergies in overlap markets.” Gross profit was $94 million versus $92 million. Gross margins 13.8% versus 10.7%. Adjusted EBITDA was $19 million compared to $16.6 million last year.

Does the above warrant a 50% haircut? The million dollar question after the big drop: What’s the stock really worth?

We turn to the classic parable of Mr. Market written by Benjamin Graham in The Intelligent Investor.

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination… Basically, price fluctuations have only one significant meaning for the true investor. They provided him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention… to the operating results of his companies.

But determining the true value of a company based on operating results is challenging. If it were easy we’d all be billionaires like Warren Buffett… How do we really know that the price of a collapsed stock like Bluelinx is “silly” low? Is Mr. Market being very obliging indeed, or is he justified in dumping the stock?

Corporate insiders and key institutional holders have better information on their companies than anyone else

To make an informed estimate of the intrinsic value of BlueLinx, you can definitely bone up on the company. Dive into the the financials. Analyze recent and past 10Qs and 10Ks. Scrutinize earnings, revenues, cash flows. Appraise the balance sheet. Research the sector BlueLinx is working in. In short, you can become an expert on the company. But few of us have the time or knowledge to be experts on every stock we invest in. So, of course we seek out experts. Who might know more about Bluelinx than us?

Sell side analysts don’t eat their own cooking.

Sell side analysts would seem to be experts on the stocks they cover. So you can study analyst reports. What are the analyst estimates for future earnings? How have fundamentals changed in light of the recent sell-off. What are the new target prices? Indeed, in a report released after BXC’s fall, B. Riley FBR analyst Alex Rygiel maintained a Buy rating on Bluelinx, though he lowered his price target to $25.00.

Certainly analyst research is worth reading. But keep in mind that an analyst is generally prohibited from investing in the stock he or she is writing about. Analysts are just writing reports, they don’t have any “skin in the game”.

So, who then do we turn to as we try to determine the intrinsic value of a collapsed stock?

How about looking to those who know the most about the stock: corporate insiders and fund holders? From my viewpoint, professional investors who actually have skin in the game are much more credible than any one else who offers simply advice.

BlueLinx insiders bought $288K of stock after the big drop.

The CEO, CFO and many other insiders of public companies spend their days immersed in the minutiae of their businesses. (Or at least they should.) They typically have worked in their specific industry for years if not decades. They know things about the company no one else knows. Of course, corporate insiders are forbidden to trade on “material, non-public information,” otherwise known as inside information. But the line between legal and illegal knowledge is grey at best.

Unless things have changed dramatically for the worse at BXC, expect to see 12.8% holder Nokomis add to its position in the near future.

Likewise, major hedge fund holders of a stock like BlueLinx have knowledge and insights that you or I don’t. Nokomis Capital owned 1.2 million shares of BXC as of Q2 end. That’s about 12.8% of the stock. As a 10% holder, Nokomis is considered an insider by the SEC. So any trades by the fund must be disclosed in a Form 4 filing with the SEC within 2 business days of the trade. If you are Brett Hendrickson, founder and portfolio manager of Nokomis since 2007, you’ve just seen the market value of your 7th largest position get cut in half over the course of two days. You have to decide whether or not to average down. No doubt Hendrickson and his team have done exhaustive research on Bluelinx. If they liked the stock at $30, do you suppose they love it at $16?

You can read the transcript of Hendrickson asking questions at BlueLinx’s 3rd quarter earnings call here.

Unless something has changed drastically for the worse at BXC, expect to see Nokomis add to its position in the near future. If the fund doesn’t add, then you have to wonder if they think BlueLinx’s operations are heading south. Should Nokomis add aggressively, then we can infer they view BXC as a value, trading below intrinsic value. A sale of BXC by Nokomis stock –which would be disclosed promptly via a Form 4 — would imply the fund has changed its sentiment on the holding.

There is no substitute for doing one’s research before investing. However, there are a few investors who have superior information about the companies they are involved with — corporate insiders and key fund holders. When determining whether Mr. Market is panic-selling or whether he’s justified in dumping shares, it’s wise to overweight the signals given in SEC filings by smart money investors.

Disclaimer:

Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this blog is meant for educational and informational purposes only. Do your own research before investing and don’t risk more than you can afford to lose. This article expresses my own opinions, and I am not receiving compensation for it (other than from WhaleWisdom). If you buy a book after clicking on one of the above links, I may received an affiliate fee. I do not have a business relationship with any company whose stock is mentioned in this article. I or my associates may hold positions in the stocks discussed.