Should You Be Tempted To ‘Sell’ Builders FirstSource (BLDR) Stock

Anabatic Fund recently released its Q4 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -11.7% in 2020 (net of fees) compared to the S&P 500 Index which returned 16.3% in the same period. You should check out Anabatic Fund's top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the Q4 2020 Investor Letter, Anabatic Fund highlighted a few stocks and Builders FirstSource Inc. (NASDAQ:BLDR) is one of them. Builders FirstSource Inc. (NASDAQ:BLDR) is a manufacturer and supplier of building materials. In the last three months, Builders FirstSource Inc. (NASDAQ:BLDR) stock gained 26.9% and on January 26th it had a closing price of $40.36. Here is what Anabatic Fund said:

"Builders FirstSource (BLDR) was one of the few bright spots in our 2020 results. BLDR shares appreciated by 60.6% as housing boomed and market sentiment turned bullish, but as usual, the ride was uneven. The share price approached $28 in late February…and then fell more than 65% over the next few weeks. From that spring low the shares more than quadrupled to close the year above $40 per share.

The company performed well despite very difficult operating circumstances. Demand whipsawed from strong to almost zero to booming in a matter of a few months. Gyrating commodity prices, constraints on labor, and stark regional disparities added to the complications. Solid financial results and plenty of cash flow also enabled the company to continue paying down debt.

With the acquisition of ProBuild in the rearview mirror and the balance sheet in good shape, BLDR announced in late August the all-stock acquisition of BMC Stock Holdings (BMCH). The two companies had been talking about a deal before the pandemic, and as the industry dynamics came into focus over the summer they decided to finalize a deal (which closed on January 4, 2021). The merger also solves the succession issue created by the pre-pandemic announcement that Chad Crowe, BLDR’s CEO and longtime executive, planned to retire. BMCH CEO Dave Flitman will take over as CEO of the combined company on April 1st .

BLDR was already the second-largest distributor in a fragmented industry, and the combined company will be almost as large as leader ABC Supply. As the industry recovers it is reasonable to expect further consolidation, and the savings and benefits from scale are real. It is also reasonable to expect some bumps in the road as the BMCH acquisition is integrated, just as BLDR experienced in the integration of its acquisition of ProBuild just a few years ago.

Unlike the leveraged acquisition of ProBuild, which left Builders’ balance sheet loaded with debt, the BMCH deal is all stock. Despite a pre-deal market capitalization of $3.3 billion for BLDR and $2.2 billion for BMCH, BLDR shareholders will own just 57% of the combined company and it’s not clear they got as much as they gave in this deal.

We sold a significant portion of our BLDR shares in the second half of 2020 as the price skyrocketed. We entered January with a small remaining position that may be sold this year. Unlike Armstrong, which has been a bigger investment and one that has seen very little buying or selling over the past five years, we’ve been more active with BLDR given the much larger price fluctuations. Our initial purchases were made in 2016, and some significant adjustments were made in late 2017 / early 2018 and again in late 2018 / early 2019. The shares sold in late 2020 had roughly tripled from their purchase price.

The company’s valuation today is discounting much of the potential upside in coming years but not much of the risk. Valuation is never the sole factor in a sell decision, and in this case the decision was a mix of market optimism, concerns about the pending integration of BMCH, the leadership succession, and tax implications.25 I also plan to follow the company closely, given its attractive attributes and history of performance. At a favorable price I would be glad to be a shareholder again."

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In Q3 2020, the number of bullish hedge fund positions on Builders FirstSource Inc. (NASDAQ:BLDR) stock increased by about 19% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in BLDR's growth potential. Our calculations showed that Builders FirstSource Inc. (NASDAQ:BLDR) isn't ranked among the 30 most popular stocks among hedge funds.

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Video: Top 5 Stocks Among Hedge Funds

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