Funds Dumping Shares, Bullish Analysts, a Short Position: The Noise Surrounding Focus Financial

The RIA consolidator’s stock resembles a Rorschach Test of sorts.

(Michael Nagle/Bloomberg)

(Michael Nagle/Bloomberg)

Two stakeholders in Focus Financial Partners have shrunk their positions and a tiny investment manager recently published its thesis for shorting the stock. However, equity analysts are generally bullish ahead of the company’s fourth quarter report, scheduled to be announced Feb. 20th.

The past year has been an emotional rollercoaster for Focus Financial (ticker: FOCS) investors. Shares of the serial acquirer of RIAs have traded as high as $40.36 and as low as $19.05. For all that drama, shares have gained an undramatic 2.9%, far below the S&P 500’s 24.3% total return.

Debt has been a long-running concern for investors. During its second-quarter earnings call last August, executives tried to calm the nerves of investors and analysts after reporting that Focus Financial’s leverage ratio—borrowings outstanding relative to cash and equivalents—rose above 4-times. In November, the acquisition of three new partner firms, which Focus takes an equity stake in, increased the leverage ratio to 4.3-times in the third quarter. However, a 34.4% revenue increase cheered investors, more than offsetting concerns about debt.

For a company that is relatively small, with a market capitalization of just over $2 billion, Focus Financial has attracted particular attention among investors, given that it is only publicly-traded RIA consolidator in a fast-growing industry. Shares went public in July, 2018 at $33.

Last year, two investment managers that each held at least 5% of Focus Financial’s common shares shrunk their positions, according to filings with the Security and Exchange Commission. Akre Capital Management, a Middleburg, Va. investment firm that manages approximately $14.2 billion in assets across one mutual fund, private funds, and separately managed accounts, filed a Schedule 13G form with the regulator Dec. 31, 2019 showing its holdings dipped below 5%.

Centerbridge, a multi-strategy investment firm with offices in New York and London, and over $22 billion under management, filed a form revealing the same thing, also on Dec. 31.

Without knowing when exactly an investor bought or sold shares, the sales do not necessarily reflect a good or bad investment. And there are many reasons investment managers move in and out of stocks. Akre Capital Management declined to comment on Focus Financial. Centerbridge could not be reached to comment on Focus Financial.

Equity researchers have been bullish on the wealth management industry and believe the growing, fragmented RIA segment will continue to translate into opportunities for some companies.

“Given that revenues of the asset & wealth managers we cover are highly correlated to the market, and are sensitive to the outlook of the economy, we believe that the companies will post solid results for 4Q19,” Oppenheimer analysts wrote in a Jan. 22 report.

The same report reiterated its Outperform rating on Focus Financial stock, citing “multiple catalysts” this year including potential in the coming earnings call for “a healthy leverage ratio within guidance could provide tailwinds for shares; de-levering could provide even more upside.”

The average price-target among analysts covering Focus Financial stock is $37.33, which is 25% above current levels.

Options activity Thursday also suggested a bullish attitude in the air. There were more than 1,100 contracts traded yesterday, representing approximately 117,800 underlying shares, or 48.9% of the stock’s average daily volume over the past month. At least 550 of them were $35 strike call options expiring August 21—meaning the owner can buy shares at that price on that date. Shares ended Thursday’s trading session at $29.

Others are reluctant to join the bulls. Matt Crow, president of Mercer Capital, business valuation and advisory firm, isn’t sure what to make of Focus Financial. He says there is “an investor for every investment” but doesn’t see a clear characterization that fits the stock. Silvercrest Asset Management or Westwood Holdings are similar, better value stocks; Focus Financial acquisitions aren’t ramping up so it’s not a growth stock; and Focus Financial has traded below the price of its initial public offering, disqualifying it from being a momentum trade, according to Crow.

“[Focus Financial Partners CEO] Rudy Adolf used to like to say that Focus was ‘the only game in town’ when it came to RIA consolidation finance and strategy. I don’t know if that was ever true, but certainly now there are multitudes of capital providers in the RIA space competing for deals,” he said.

At least one tiny investment manager has a negative outlook on Focus Financial and shared it publicly last month. George Livadas, the founder and portfolio manager of Upslope Capital Management, a Colorado-based investment firm that manages $3.8 million, published a paper Jan. 15 explaining his short position against the RIA consolidator. At the time, shares were trading slightly below their current price of $29.75.

In his note, Livadas criticizes Focus Financial for not disclosing more information about its underlying businesses and argues it intentionally obfuscates its performance. He also said the company has a “dubious” capital allocation record. “We’re often attracted to shorts where we can easily observe management aggressively pushing an investment case that doesn’t sync with reality,” the report states.

Livadas started Upslope in 2017 and was previously a vice president at BMO Capital Markets in New York, where he worked in equity research and investment banking.

Focus Financial could not be reached for comment.

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