RILY: What's up with the most hated stock on Wall Street?
Short sellers are preying on a company that seems to be more dead than alive. Excessive risk taking and PR issues due to fraud allegations have taken their toll. However, there may be value left.
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
TLDR Summary
Riley is officially a boutique investment bank. But their investment and loan portfolio is so large that it would be more appropriate to call them a leveraged hedge fund. With 80% short interest of float, it has become the most hated stock on Wall Street. There is a huge short seller community online that has created a deafening echo chamber.
The bear case rests on three pillars:
The company sits on a ton of bad leverage.
Their capital-light services businesses are too weak to make a difference.
Management can’t be trusted because their are entangled in fraud cases.
The company has various issues to deal with at the moment. However, the most important and most imminent one seems to be their $463m exposure to Franchise Resource Group (FRG), the troubled leveraged buyout of an important Riley client that is connected to a financial fraudster. In their recent preliminary earnings release, Management indicated that a major write-off of its FRG stake is imminent. This write-off will likely wipe out their entire equity book value, thereby seemingly fully supporting the bear case.
This is absolutely an existential crisis that may very well end in bankruptcy and prove short sellers 100% correct. But they need to bust this company soon because positioning is lopsided. In my opinion, short sellers are trapped. They are sitting ducks. Weak hands waiting to be shaken out by Mr. Market.
Riley stock is down 85% since the beginning of the short seller attack in early 2023. This decline was interrupted by two major short squeezes when the stock more than doubled within weeks. As of today, short interest has climbed back to exactly the level it reached before the last short squeeze this spring. A potential catalyst could be the CEO’s attempt to take the company private. Short sellers might ridicule such a scenario. But can they rule it out? Do they really want to risk chasing the door when everyone else does?