Legendary investment manager Peter Lynch once said, "Insiders might sell their shares for any number of reasons, but they buy them for only one: They think the price will rise."
One relatively unknown financial services company with strong insider buying is B. Riley Financial (RILY 4.70%), and in the past year the company's co-founder and co-CEO, Bryant Riley, has spent millions of dollars buying shares.
Last year the financial services company faced difficult times, but it has bounced back with a vengeance. With its stellar earnings last year continuing into the first quarter this year, the company sports a cheap valuation with a price-to-earnings (P/E) ratio of 3.6 along with a history of strong growth.
How B. Riley Financial makes its money
B. Riley Financial provides a wide range of financial services through various subsidiaries. Its services include investment banking, wealth management and brokerage, RIA advisory, and forensic accounting. The company has done a stellar job of serving its niche market -- small- and mid-cap companies -- for over 25 years now.
Image source: Getty Images.
A majority of the company's revenue, 74%, comes from services and fees, with its next-largest revenue producer being trading and interest income, which makes up nearly 23% of total revenue. Through 2020, the company split its revenue into five major segments: capital markets, auction and liquidation, financial consulting, principal investments, and brands.
Last year, its capital markets segment was its largest, accounting for 68.5% of revenue. Its next largest segment is financial consulting, representing 10.1% of revenue, followed by auction and liquidation, representing another 9.8% of revenue.
A focus on small and mid-size firms has been its strength
B. Riley has done a stellar job of providing financial advisory services to small and mid-cap firms, which was where its business focus began when the company was founded in 1997.
In the first quarter, B. Riley posted total revenue of $600 million, crushing last year's revenue, which came in near $0. A quick word on year-over-year comparisons: Investors should keep in mind that the first quarter of 2020 was a rough one for many, especially B. Riley. Trading losses amounted to $182 million, and other services and fees came to a screeching halt. It saw an operating loss of $121 million in the first quarter last year, but valiantly bounced back, as seen by its full-year 2020 and first-quarter 2021 results.
In this year's first quarter, the company posted solid operating and investment book results, led by robust investment banking activity. Its consulting business also performed well, benefiting from increased bankruptcy restructuring moves.
During the quarter, the company assisted in Rocky Brands' $230 million acquisition of Honeywell's brand portfolio as well as special purpose acquisition company African Gold Acquisitions' $360 million IPO. B. Riley also recently served as an advisor to AMC Entertainment Holdings for its stock offering in June, which raised $587 million for the company to help pay down debt.
In February it completed an acquisition of National Holdings, which has over $19.6 billion in client assets, boosting B. Riley's total client assets to $31 billion. As a result of this acquisition, the company began separately reporting a sixth segment, wealth management. This new segment accounted for $68 million in revenue, or 11% of its revenue for the quarter. Its capital markets segment continues to be its largest by far, accounting for 78.7% of its total revenue in the period.
As a result, B. Riley posted a record net income of $257 million during the period, resulting in diluted earnings per share of $8.81. This compares with last year's net loss and diluted loss per share of $98.7 million and $3.83, respectively.
Insiders keep buying the stock, and for good reason
Bryant Riley recently completed a $2.2 million purchase of company stock in June and has purchased over $10.9 million in stock since November. In addition, director Randall Paulson has purchased $1.5 million in shares since November.
Insiders keep buying this stock because of its history of strong growth, as well as its cheap valuation. In 2020, total revenue increased 38.4% to $903 million, operating income was up 107% to $344 million, and net income was up 151% to $205 million. This was all despite the pandemic, which put downward pressure on the company's numbers in the first quarter noted above.
Its history of strong growth has been on display for years now. In the past five years, its revenue has grown at a 51.7% compound annual growth rate (CAGR), while its net income has grown at a 77% CAGR.
A stellar company at a cheap price
B. Riley has seen strong growth over the past five years, and that growth continued into the first quarter this year. At Monday morning's prices, the company sported a super cheap P/E ratio of 3.6 and a solid dividend yield of 2.6%.
When you take all of these factors into consideration, B. Riley Financial is a stellar company with promising growth prospects. Its acquisition of National Holdings boosts its wealth management segment, and its long-term focus on small- to mid-cap companies makes this relatively unknown financial services company an attractive stock worth adding to your watch list.
