StreetSweeper New Short: Real Industry Valuation 'Ludicrous,' Insiders Are Selling

Jayson Derrick
0

Shares of Real Industry Inc (NASDAQ: RELY) were trading lower by more than 2 percent on Wednesday after The Street Sweeper's Sonya Colberg blasted the company's business model and the stock's valuation.

Real Industry is a "public company seeking to acquire well managed and consistently profitable businesses as well as growth opportunities for its existing operations." In other words, as pointed out by Colberg, the former sub-prime mortgage company has now become a "mishmash business of selling face cream and recycling aluminum."

The question remains, how does Real Industry finance all of its acquisitions? Colberg offers a simple answer: "stock offerings and big debt just to keep the doors open."

Meanwhile, Real Industry's stock is trading at a "ludicrous" P/E multiple of 1,037 versus the scrap metal industry's average P/E of just 11.

Colberg also took issue with Real Industry's strategy of taking tax advantages based on net operating losses. This strategy is "not the way to build a business" and may only work if the company has a positive operating income - something it has missed in three of the past four years.

Colberg further noted that Real Industry's operational losses in 2015 were the biggest in five years despite recording $1 billion in revenue.

Shares of Real Industry have gained around 15 percent since the start of 2016, but this hasn't deterred insiders from cashing out. According to Colberg, the company's Chief Financial Officer Kyle Ross began unloading shares in late February at a range of $6.05 to $6.77.

"This former sub-prime mortgage company with a 1,037 P/E actually wants investors to believe it can turn recycled aluminum, anti-aging cream and net operating losses into gold," Colberg concluded. "We're not buying it. In fact, we fully expect the stock to fade to $4.50 per share, a valuation far more reasonable than Real's business plan."

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© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

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