When a Short-Term Catalyst Backfires
QXO update – another day, another deal.
Not yet a paid subscriber to Herb on the Street and my Red Flag Alerts? Join the growing club of investors who want to avoid the biggest mistake investors make…Find out more and how to subscribe right here.
When I informally red-flagged QXO a few weeks ago, the focus was on a short-term catalyst tied to dilution.
On second thought...
The risk to the thesis, which I couldn’t have been any clearer about short of putting it up in bright neon lights, was that analysts and investors would overlook dilution and give the company what I call the Brad Jacobs premium. Jacobs is QXO’s founder and CEO, who has developed a cult-like following thanks to his history as a money-maker rolling up other industries. You can see it in QXO’s stock...
With QXO, he’s attempting to roll up the building products industry. It currently trades at roughly double the valuation of its peers. But as a William Blair analyst said yesterday in his initiation report, with a target well above current levels...
In the near term, we believe QXO should trade above the group average as a best-in-class management team executing a proven rollup playbook.
Or put another way... the Jacobs premium.
And he wrote that hours before QXO announced a hostile $5 billion bid for GMS, which manufactures drywall and wallboard – and which was the Blair analyst’s top choice to be acquired. This comes just weeks after completing its $11 billion hostile acquisition of Beacon Roofing.
And this comes before QXO has reported its first quarter including Beacon’s results... where the dilution tied to the original thesis would have been evident. But with the GMS deal, in my view, that’s all now irrelevant – and that’s regardless of whether it does or doesn’t happen or even whether once the financing is disclosed, it results in more dilution. Because nobody will care. (The stock is actually up on a WSJ report that a Battle Royale is brewing, with Home Depot starting a bidding war for GMS.)
All that matters, certainly right now, is that Jacobs is doing deals... and doing them quickly,enough to keep pushing things forward. As one friend and longtime Jacobs watcher put it...
He’s aggressive, he’s got capital, he’s got a team in place and had months to plan his moves. I don't know GMS but he’s not going to take his time to capitalize on what he perceives on the opportunity.
That’s not to say there isn’t plenty of risk. There is with every company, including those run by legends. But right now I’ve got better fish to fry. (Or, as it tends to be in my case, broil.)
You get some right. You get some wrong. Fess up when you mess up. Life goes on...
You can read my original QXO report here, and my follow up here.
DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts and filings, and should not be construed as personal investment advice. (Because it isn’t!) I do not have a position in any stock mentioned here.
Feel free to contact me at herb@herbgreenberg.com