Nu Horizons: Is This Time Different?

All of the correlation between Nu Horizons (NUHC) and its competitors and suppliers has broken down. “This time is different” can be the four most expensive words an investor can use.

I was trying to determine the best way to hedge my Nu Horizons short. Unfortunately, the recent gains in the stock don’t appear to be correlated to their peers or their suppliers.

Xilinx (XLNX) has used Nu Horizons as a distributor for 19 years. Xilinx supplies approximately 1/5th of the product Nu Horizons sells. Not surprisingly, there is a strong correlation between the two companies, at least until June of this year.

Xilinx is an excellent indexing stock for measuring the communication sector. I like to use it as a hedging tool, and considered using it to hedge my short position in NUHC. There’s nothing wrong with Xilinx as an index as it still tracks other companies that sell into the Networking space.

Nu Horizons derives the majority of its revenue from selling into the Communications/Networking market. Yet the correlation between Nu Horizons and suppliers into this market has completely broken down. Vitesse Semiconductor (VTSS), Sun Microsystems (SUNW), and Xilinx sell almost exclusively into the Communications/Networking space, and they account for over half of the Nu Horizons supply chain COGS.

The market clearly believes that Nu Horizons has de-coupled itself from the fortunes of its three largest suppliers, and the Communications/Networking business in general.

What about distribution companies in general? What about the relationship between Nu Horizons and its peers, Arrow Electronics (ARW) and Avnet (AVT)? That’s broken too.

The historical correlation between Nu Horizons and its suppliers, competitors, and end market has broken down. The first break was late summer last year, and the second was June of this year.

One notable event that took place in this time frame was the signing (warning Word .doc link) of Cameron Associates on May 30th.

This leaves us with two possible outcomes:

1. The market believes that Nu Horizons has fundamentally disassociated itself from its existing suppliers and the customers they serve. After 10 years of correlation to these markets, this time it’s different.

2. Nu Horizons, for any number of reasons, including a theory proposed here, has experienced a short-term surge in investor interest and positive liquidity flows. Once this subsides we will observe a classic reversion to the mean.

“This time is different” can be the four most expensive words an investor can use. I do not see what is different this time. I do not see what competitive advantages Nu Horizons brings outside of the market it has operated in for decades. An analysis I performed of financial metrics important to distributor efficiency (inventory turns, return on working capital) illustrates that Nu Horizons falls short of its peers, Avnet and Arrow.

Nu Horizons has signed up new suppliers outside of the Networking and Communication area and more are probably coming. But it is not clear to me what advantages the company brings to these new consumer markets.

I am short Nu Horizons, long Vitesse Semiconductor.

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Comments

[Pullease]

Andrew,

I believe you're missing the more obvious "difference" in NUHC to all the others you've mentioned. The Memec/Avnet merger opened an immediate slam dunk hyper growth opportunity for them, as they both picked up new talent and the customers. No other disty company is sporting growth of eps in the same ball park as NUHC. Yes margins are low, yet the demand creation end seeds are about to be sewn....while regular business comes in over the gunnals. This is a "one off" situation that won't last forever, but it's getting better before it gets worse, imho. Shorting is a bad bet this time. Good luck.