Why Ritchie Bros Auctioneers (RBA) Stock is a Compelling Investment Case

Upslope Capital recently released its Q2 2020 Investor Letter, a copy of which you can download here. The Fund returned 1.2% net of fees for the June quarter, as compared to the 23.9% return of the S&P Midcap 400 ETF and 8.1% return of the HFRX Equity Hedge Index. You should check out Upslope Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, Upslope Capital highlighted a few stocks and Ritchie Bros Auctioneers Inc (NYSE:RBA) is one of them. Ritchie Bros Auctioneers Inc (NYSE:RBA) operates the world’s leading marketplace for heavy equipment. Year-to-date, Ritchie Bros Auctioneers Inc (NYSE:RBA) stock gained 4.4% and on July 21st it had a closing price of $42.69. Here is what Upslope Capital said:

“Ritchie Bros. is the world’s leading auctioneer and operator of marketplaces for the sale of used heavy equipment (construction, farming, energy, etc.). Through in-person and online auctions, as well as brokered transactions, RBA facilitated the sale of $5+ billion worth of equipment in 2019. Our thesis is as follows:

1) Clear, durable competitive advantages. As the clear leader in facilitating used heavy equipment sales, RBA enjoys significant competitive advantages – similar to those of a dominant financial exchange (e.g. stock market). When customers want to transact, they are far better served participating in an RBA auction, which offers deeper inventory selection, superior access to buyers and more efficient pricing. While direct and indirect competition certainly exists, RBA’s competitive advantages should continue to strengthen over time, as the company grows.

2) Potential inflection point with parallels to financial exchanges. Due to COVID-19, RBA rapidly flipped to operating its auctions 100% online in Q1. While in-person auctions won’t disappear for good, it seems likely that an acceleration towards a greater online mix will stick. If so, there are some interesting, potential precedents in the financial exchange world. When financial exchanges have shifted in the past from floor- and/or phone-based trading to purely “electronic” (online) trading, volumes have generally moved higher. While RBA’s business is focused on a very different “asset class,” it seems possible such a shift could remove transaction frictions and provide a boost to volumes and margins over the long-run.

3) Financial results tell a consistent story. There are a number of metrics that appear supportive of the thesis that RBA has an attractive operating model and durable competitive advantages: (A) RBA has historically grown GTV (global transaction value, a key metric used to track the health of the business) in the high-single-digit range. Even in the financial crisis, GTV only fell ~8% from peak to trough (over two years). (B) RBA’s revenue take rate (revenues as a % of GTV – very rough approximation of pricing power) has grown steadily over the last 10+ years. (C) Solid and sustained returns on invested capital and high/growing free cash flow (to firm) margins.

4) Potential cyclical upside. RBA has indirect exposure to infrastructure spending (and odds for some kind of stimulus on this front in the next 12 months appear higher than normal) and could be a beneficiary of distress in the energy sector (liquidation auctions).

5) Strong balance sheet. We may be nearly out of the woods with regards to the COVID-19 crisis (from a market perspective), but a strong balance sheet is still highly desirable today. RBA is levered just 1.0x net and has good access to liquidity.

6) Key Risks. (A) New, unproven CEO, (B) lumpy quarter-to-quarter performance and (related) potential for losses on inventory deals (i.e. part of RBA’s model involves actually purchasing inventory to be sold in auctions), (C) uncertainty regarding long-term impact of COVID-19, (D) general and unpredictable cyclical nature of the business.”

In Q1 2020, the number of bullish hedge fund positions on Ritchie Bros Auctioneers Inc (NYSE:RBA) stock decreased by about 33% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with RBA’s growth potential. Our calculations showed that Ritchie Bros Auctioneers Inc (NYSE:RBA) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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