Merion Road Capital Management, an investment management firm, has released its Q3 2021 letter to investors – a copy of which can be downloaded here. Merion Road Capital’s large-cap long-only portfolio fell 2.7%, while its small-cap long-short portfolio rose 0.7% in the third quarter of 2021, against its Russell benchmarks 2000, Barclay Hedge Fund and S&P 500 which delivered a return of 4.3%, 0.1% and 0.6% respectively for the same period. You can check out the top 5 holdings in the fund to get a feel for their top picks for 2021.
Merion Road Capital Management, in its letter to investors for the third quarter of 2021, mentioned Builders FirstSource, Inc. (NYSE: BLDR) and discussed his position on the company. Builders FirstSource, Inc. is a Dallas, Texas-based woodworking company with a market capitalization of $ 12.1 billion. BLDR has returned 43.47% year-to-date, while its 12-month returns are up 79.27%. The stock closed at $ 58.29 per share on October 21, 2021.
Here’s what Merion Road Capital Management has to say about Builders FirstSource, Inc. in its Q3 2021 letter to investors:
“I added to our position in Builder’s FirstSource (“BLDR”) during the quarter. BLDR is the largest national supplier of structural construction products and value-added components to the residential construction market. They have been active in consolidating the industry, most notably with the BMC merger earlier this year. Like other distributors, BLDR enjoys advantages of scale which give it a robust product offering, improved purchasing power and leverage on fixed costs. They will continue to acquire smaller competitors and have announced 5 new deals so far this year.
I consider the strategic advantage of these acquisitions in three different compartments. There are the basic acquisitions of facilities and customer lists that increase scale and geographic reach. One example would be the company’s acquisition in May of John’s Lumber, a lumber and specialty products distributor serving the Detroit MSA, for 0.5 times revenue. There are product acquisitions that leverage their platform to increase distribution and improve product offering. For example, last month BLDR announced the acquisition of California TrusFrame, a designer and manufacturer of prefabricated components such as trusses and wall panels, for 1.3x revenue. Finally, BLDR began to invest in software and services. In June, they spent $ 450 million to purchase WTS Paradigm, a software company that deals with the complexity of setting up, estimating and fabricating buildings, with revenue of 9 , 0 times. By using software in the planning process, WTS Paradigm reduces material and labor waste, ensures optimal product and design fit, and lightens the contractor’s workload. BLDR followed that up with a much smaller software acquisition in September.
BLDR is only in the early stages of its software investment, so it’s difficult to determine exactly how this will affect the business in the years to come. Management believes there is plenty of fruit at hand, pointing to a McKinsey study ranking the construction industry second to last on global digitization. If anyone has had work done in their house, I’m sure they can attest to that anecdotally. BLDR plans to leverage WTS Paradigm to increase internal productivity (i.e. better estimate leading to fewer site visits), sell software to existing customers, and drive greater adoption of value products. added. So, thinking about a few years, I think the goal would be to have higher margins on their commodity business, a greater mix of revenue from value added products, a stronger relationship with their customer. and increased competitive advantage … “(Click here to view full text)
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Based on our calculations, Builders FirstSource, Inc. (NYSE: BLDR) failed to land a spot on our list of the 30 most popular stocks among hedge funds. BLDR was in 24 hedge fund portfolios at the end of the first half of 2021, compared to 25 funds in the previous quarter. FirstSource Builders, Inc. (NYSE: BLDR) generated a return of 29.08% in the last 3 months.
The reputation of hedge funds as savvy investors has been tarnished over the past decade, as their hedged returns could not keep up with the unhedged returns of stock indices. Our research has shown that small cap hedge fund stock selection managed to beat the market by double digits every year between 1999 and 2016, but the margin for outperformance has shrunk in recent years. Nonetheless, we were still able to identify in advance a select group of hedge funds that have outperformed S&P 500 ETFs by 115 percentage points since March 2017 (see details here). We were also able to identify in advance a select group of hedge funds that underperformed the market by 10 percentage points per year between 2006 and 2017. Interestingly, the margin of underperformance of these stocks has increased in recent years. Investors who are long in the market and short on these stocks would have reported more than 27% per year between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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