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Here’s What Makes Voss Capital Bullish on BlueLinx Holdings (BXC)

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Voss Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly net return of -11.0% was delivered by the Voss Value Fund for the third quarter of 2021, and -11.8% was delivered by the Voss Value Offshore Fund. These compare to the -4.4% total return for the Russell 2000, -3.4% total return for the Russell 2000 Value, and +0.6% total return for the S&P 500 for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Voss Capital, in its Q3 2021 investor letter, mentioned BlueLinx Holdings Inc. (NYSE: BXC) and discussed its stance on the firm. BlueLinx Holdings Inc. is an Atlanta, Georgia-based wholesale company with a $766.4 million market capitalization. BXC delivered a 169.86% return since the beginning of the year, while its 12-month returns are up by 164.70%. The stock closed at $78.96per share on December 20, 2021.

Here is what Voss Capital has to say about BlueLinx Holdings Inc. in its Q3 2021 investor letter:

"We believe those calling for a peak in housing activity have grown too cautious too soon. Most of the bearish arguments we encounter appear more sentiment based, e.g., prices have come too far too fast. Setting aside this understandably inherent acrophobia-induced caution and focusing more squarely on empirical evidence, the supply/demand picture remains on solid footing thanks to continued record low housing inventory accompanying fresh 30-year lows in single family and multifamily vacancies.6 Furthermore, roughly 2 million more people will turn 35 years old anually over the next five years, as compared to the previous five years. Since 35 is the peak first time home buying age, we believe there will be sustained demand for years to come. Our long portfolio remains heavily geared to entry-level housing related companies, as well as those tied to home remodeling.

One of our preferred ways to express this bullish thematic view is through BlueLinx Holdings Inc. (BXC). We knew investors had been bracing for a profit collapse on the back of a fast 73% decline in lumber prices that occurred from May to September, but we had a differentiated view based on the company’s earnings mix that is skewed to Specialty products with less volatile pricing as opposed to purely commoditized framing lumber. The stock continues to be overly discounted based on apathy, ambiguity, and fear over the housing cycle. By our math, even in the unlikely event that BXC’s Structural Products segment produces $0.00 in gross profits over the next year (compared to $187.7M LTM) and their Specialty segment revenue declines 5-10% from here, the company still has sustainable earnings power in excess of $12 per share. At 10x earnings, a modest discount to the company’s long-term P/E ratio despite the balance sheet being deleveraged, the stock still has 63% upside. A more reasonable earnings power estimate is in the $16.50-$19.00 range, which puts the stock under 4x fully taxed net income. Unfortunately, the Board did not pull the trigger on any of their authorized share buyback last quarter before the stock rose 50% after earnings. If they sharpen their pencils anytime soon and buy stock back at this depressed valuation, the normalized EPS number should only move higher."

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Based on our calculations, BlueLinx Holdings Inc. (NYSE: BXC) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. BXC was in 14 hedge fund portfolios at the end of the third quarter of 2021, compared to 15 funds in the previous quarter. BlueLinx Holdings Inc. (NYSE: BXC) delivered a 60.68% return in the past 3 months.

In September this year, we published an article that involved BXC in the 11 Stocks to Buy Now According to Jeffrey Gendell’s Tontine Asset Management. You can find more than 100 investor letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q3 page.

Disclosure: None. This article is originally published at Insider Monkey.