Fundamental Short Selling Research

Eric Fernandez, CFA

TwoRiversAnalytics

Equity Bottom-Up

<ul>
<li>This model seeks companies that are potentially “overearning”, defined as companies with unusually high margins relative to their own history or relative to the industry. </li>
<li>The reasons for the margin increases are sometimes unsustainable or fraudulent. The  critical judgement involves to what extent unsustainable margins are embedded in a company’s forecasts and/or the stock’s valuation. </li>
<li>These shorts tend to have moderate to higher betas, higher valuations due to recent strong results and good short responses to subsequently disappointing earnings.</li>
</ul>


This model seeks companies that are potentially “overearning”, defined as companies with unusually high margins relative to their own history or relative to the industry. 
The reasons for the margin increases are sometimes unsustainable or fraudulent. The  critical judgement involves to what extent unsustainable margins are embedded in a company’s forecasts and/or the stock’s valuation. 
These shorts tend to have moderate to higher betas, higher valuations due to recent strong results and good short responses to subsequently disappointing earnings.


Overearning Short Candidates: Builders FirstSource, IBM, Forward Air Co, Deere & Co.

Selected Quarterly & Annual Newsletters from Funds, Fund Newsletters

Fund Newsletters

Selected Quarterly & Annual Newsletters from Funds

Thematic (Sector/Industry)

<ul><li>Black Bear Value Fund returned -2.4% in September and +0.7% YTD.</li><li>This is the kind of environment where the ability to play offense and invest for the future is advantageous to our partnership.</li><li>Valuations between what we own and the “market” are still very wide.</li></ul>

Black Bear Value Fund returned -2.4% in September and +0.7% YTD.This is the kind of environment where the ability to play offense and invest for the future is advantageous to our partnership.Valuations between what we own and the “market” are still very wide.

<ul>
<li>Builders FirstSource announced earnings Monday.  Below are a summary and our thoughts on our existing short recommendation.</li>
<li>The company continues to overearn based on price increases and housing demand pulled forward during Covid.</li>
<li>The housing market has started to turn down.  BLDR will not be able to sidestep the housing cycle.</li>
</ul>


Builders FirstSource announced earnings Monday.  Below are a summary and our thoughts on our existing short recommendation.
The company continues to overearn based on price increases and housing demand pulled forward during Covid.
The housing market has started to turn down.  BLDR will not be able to sidestep the housing cycle.


<ul>
<li>Acquisitions and product price increases amid home-buying demand drove a dramatic increase in sales.  Product shortages and operating leverage enabled the company to push EBITDA margins 1000bps. </li>
<li>The macro environment for homebuilding is inflecting.  GDP posted a down since 2014.  Consumer sentiment is collapsing from the surge in inflation, political acrimony, crime and the war in Ukraine.  </li>
<li>The stock is expensive on normalized margins.  After a dramatic run, the stock trades at high multiples of normalized earnings, but deceptively moderate multiples on inflated earnings.</li>
</ul>


Acquisitions and product price increases amid home-buying demand drove a dramatic increase in sales.  Product shortages and operating leverage enabled the company to push EBITDA margins 1000bps. 
The macro environment for homebuilding is inflecting.  GDP posted a down since 2014.  Consumer sentiment is collapsing from the surge in inflation, political acrimony, crime and the war in Ukraine.  
The stock is expensive on normalized margins.  After a dramatic run, the stock trades at high multiples of normalized earnings, but deceptively moderate multiples on inflated earnings.


Short Builders FirstSource (BLDR) On Overearning and Housing Downturn Thesis

Cf Industries Holdings / Equity Bottom-Up

Overearning Short Candidates, CF Industries, Photronics, LSB Industries, Builders FirstSource

United States

Builders FirstSource, Inc. manufactures and distributes building products to professional homebuilders.

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Builders Firstsource (BLDR US)

Overearning Short Candidates: Builders FirstSource, IBM, Forward Air Co, Deere & Co.

Margin over-earners are fertile hunting ground for shorts if the reasons for the margin increase are unsustainable or fraudulent. This week:...

Eric Fernandez, CFA

Black Bear Value Fund Q3 2022 Letter

Black Bear Value Fund returned -2.4% in September and +0.7% YTD. This is the kind of environment where the ability to play offense and invest for...

Fund Newsletters

Builders FirstSource (BLDR): Stay Short

We remain short Builders FirstSource. The company continues to overearn from high sale prices and product shortages. Further, investors...

Eric Fernandez, CFA

Short Builders FirstSource (BLDR) On Overearning and Housing Downturn Thesis

Builder’s FirstSource benefitted from a product shortage and high prices. Normalization and the housing downturn will cut sales and earnings...

Eric Fernandez, CFA

Overearning Short Candidates, CF Industries, Photronics, LSB Industries, Builders FirstSource

Margin over-earners are fertile hunting ground for shorts if the reasons for the margin increase are either unsustainable or fraudulent: CF...

Eric Fernandez, CFA

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