EBIX - Ebix Inc

[siddharth18]

In other news...

 

The Lawsuit (which has already been denied class status), should no longer be a risk, since the Meyer v. Greene (St. Joe Einhorn Short) decision by the US Court of appeals. 

 

The US Court of Appeals for the Eleventh Circuit recently issued an important decision that addresses two types of allegations that plaintiffs routinely rely on to plead loss causation in federal securities fraud cases. In Meyer v. Greene, 2013 US App. LEXIS 4187 (11th Cir. Feb. 25, 2013), the Eleventh Circuit appears to have become the first federal court of appeals to rule definitively that the mere announcement of an investigation by the US Securities and Exchange Commission (“SEC”) followed by a decline in a company’s stock price is insufficient to plead loss causation. The Court also ruled, consistent with decisions from other federal circuits, that a negative third-party analyst presentation is not a corrective disclosure for purposes of pleading loss causation if the presentation is based on publicly available information.

 

http://www.skadden.com/newsletters/Inside_the_Courts_June_2013.pdf

 

The link necessary to plead loss causation cannot be established.  The plaintiff can’t be awarded damages based on a third party “Analyst” report based on public information.  The irony here, is that Faruqi leans so heavily on the Copperfield report (which refers to already public SEC docs) that they will be unable to switch gears.

 

That should relieve some of the cash burn from the legal fees.  Skadden doesnt come cheap.

 

 

 

 

Excellent! Basically sums it up:

 

"the mere announcement of an investigation by the US Securities and Exchange Commission (“SEC”) followed by a decline in a company’s stock price is insufficient to plead loss causation. The Court also ruled, consistent with decisions from other federal circuits, that a negative third-party analyst presentation is not a corrective disclosure for purposes of pleading loss causation if the presentation is based on publicly available information"

[blainehodder]

And the SEC has already been through the 2011 and 2012 filings... but maybe Daniel chooses to ignore that as well.

 

http://www.sec.gov/Archives/edgar/data/814549/000000000013002804/filename1.pdf

 

Dear Mr. Raina:

We have completed our review of your filings. We remind you that our comments or changes to disclosure in response to our comments do not foreclose the Commission from taking any action with respect to the company or the filings and the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. We urge all persons who are responsible for the accuracy and adequacy of the disclosure in the filings to be certain that the filings include the information the Securities Exchange Act of 1934 and all applicable rules require.

 

Of course, the SEC protects themselves here with boilerpolate language, but the review has been complete for some time.  If this led them to anything material, they would have brought charges by now.

[Liberty]

Looks like he got a bit aggressive with the 6 buck strikes. Hahaha.

 

I wouldn't say it's over yet, as they've shown great ability to manipulate the stock's price in the past, but there has to be a diminishing return to their tactics. What was shocking the first time in 2011 becomes less shocking the fifth time years later, and at some point you have to assume that everybody who could be scared was scared and the remaining holders are more resilient.

[Guest wellmont]

can't wait to see how may shares ebix buys this quarter. :) also breathlessly waiting for the insider buys at such a bargain price!

[Liberty]

Looks like it'll finish the day in positive territory. Diminishing returns to the scare tactics indeed.

[Guest wellmont]

it's not about the report. it's about the business. this will be decided not by reports, but by what happens to the ebix business. this stock would be circling the drain were we not in an artificial environment. but what will happen, will happen.

No insider buying. and we shall see if ebix is buying stock. I doubt it.

[no_free_lunch]

Cemadh,

 

The $7 put is superior to the $6 put for all stock prices below $6.85. For stock prices above $7 both are worth $0.

 

You have a huge hole in your argument here.  The .15 $7 put costs over twice as much as the .07 $6 put, hence for the same dollar amount you can buy over twice as many $6 puts.  When you factor that in the $6 puts are superior at prices below $5 or so.

 

For instance, imagine you have $10k.  You can buy options on 66k shares with the $7 put.  Or, you can buy options on 142k shares with the $6 put.  If the stock were at 0, those 66k shares would be worth $462k, while the 142k shares (from the $6 put) are worth $852k.

 

[cemadh]

No_free_lunch - i agree

This was already illustrated by sidharth18 in an earlier post.

 

I was thinking of x number of options instead of x dollars available to invest - bad math :-)

 

But my original question still remains. It is more LIKELY that you will make money at higher strike because even if you assume that your short attack ( such as a hit piece on Seeking Alpha) works, you really cannot control the extent of the drop in the share price. that being said, the $10 put is probably "superior" to either the $6 or the $7 strikes. No math here, just likelihood of stock dropping by X dollars ( or cents). This is esp. true in such near term puts. No?

[no_free_lunch]

Yes, in practicality the $7 might be better, I was just talking theory! :)

 

I don't know I just follow EBIX casually, so no opinion, to hard to make sense out of it.  Huge short interest so I could just easily see it spiking.

[siddharth18]

I just bemoan the lack of long-term call options on this security. The outcome is going to binary and the consequences are going to be absolute. I really want to play this asymmetrically and gain leverage on the upside while keeping my downside predictable and limited.

 

Here's what I'm wondering - Assuming one had contacts at a big bank and wanted to fork out millions, could one, theoretically persuade the banks to sell you long-term (2015, 2016) options or some similarly structured derivatives?

 

[matts]

I just bemoan the lack of long-term call options on this security. The outcome is going to binary and the consequences are going to be absolute. I really want to play this asymmetrically and gain leverage on the upside while keeping my downside predictable and limited.

 

Here's what I'm wondering - Assuming one had contacts at a big bank and wanted to fork out millions, could one, theoretically persuade the banks to sell you long-term (2015, 2016) options or some similarly structured derivatives?

 

Yes, this type of custom equity derivative is offered by all decent sized broker-dealers. Not even a big deal, they just use Black Scholes to model it (would build in a safety/profit spread). You would have to be a very big retail client however.

[Phaceliacapital]

Interesting story, surprised to find this large a thread (hadn't noticed it before).

 

Will dig a little deeper into it, included history on insider buys.

[Guest wellmont]

there has been no insider buying this year. RR exercised penny priced options this year and last (ebix is simply a former penny stock that has had multiple reverse stock splits). He was a big seller of stock in 2012. why no insider buys when the stock is selling so "cheap"? I did the analysis earlier in the thread. rr has taken tens of millions in compensation over the years, much of it from penny stock option grants.

[siddharth18]

As of October 1st, it's officially the most hated stock in NASDAQ, with a whopping 42.46% short interest and shares aren't easy to borrow on IB. Unless very adverse news comes out, very quickly...this plot might have an interesting twist...

 

 

 

 

http://i.imgur.com/RcRKmRA.png

[siddharth18]

(ebix is simply a former penny stock that has had multiple reverse stock splits)

 

Under Raina, Ebix had ONE reverse stock split that was 1:8. But, they also had 3:1 stock splits TWICE AFTER that reverse split, so in total, it had an a net effect of a split, NOT a reverse split and definitely not multiple reverse splits.

 

Regardless of splits though, a $1,000 investment in early 2000's (when Raina became Chairman on May 31, 2002), would have be worth almost $50,000 investment by 2011 at a CAGR of over 50%! How many other companies went up 50 fold during this lost-decade? Again this is after the fact that diluted shares count (adjusted for splits) went from 28 million in 2005 to 40 million in 2011. Even in the light of these throwaway prices, you are sitting on a 22 bagger if you'd been with Raina since 2002 - an implied CAGR of over 32% up to this point.

 

Raina is a bit self-promotional, yes, but if you can look past that - it's hard to argue against his performance.

 

----

 

Few updates:

 

16,424,622 shares short, as of 9/30/2013. http://www.nasdaq.com/symbol/ebix/short-interest

 

Ebix has been looking to hire more people! Job openings recently posted here and here.

 

Gotta keep an eye on the price as I wouldn't be surprised if there's another attack before October 19th as 75,000 puts expire on that date!

 

EBIX was featured in ValueInvestorInsight:

 

http://www.valueinvestorinsight.com/pdfs/TrialIssueSE2013.PDF (Page 12-13). Pretty much recaps the thesis that it's hard to fake cash, hard for customers to leave its deep moated model, and the outcome of investigations most likely won't cripple the company.

 

At low $10/share, a massive FCF yield, a capital-light, moated toll-booth business, one is hardly paying for "growth."

[siddharth18]

Looks like he got a bit aggressive with the 6 buck strikes. Hahaha.

 

I wouldn't say it's over yet, as they've shown great ability to manipulate the stock's price in the past, but there has to be a diminishing return to their tactics. What was shocking the first time in 2011 becomes less shocking the fifth time years later, and at some point you have to assume that everybody who could be scared was scared and the remaining holders are more resilient.

 

His $6 puts expired today worthless.  :D

[ItsAValueTrap]

Pretty much recaps the thesis that it's hard to fake cash

Well there have been Chinese reverse mergers, Satyam, and companies like Refco (kinda) who have proven that wrong.

[siddharth18]

Pretty much recaps the thesis that it's hard to fake cash

Well there have been Chinese reverse mergers, Satyam, and companies like Refco (kinda) who have proven that wrong.

 

I do see some differences though:

 

EBIX is headquartered in Atlanta, not in China or India.

It has paid out more CASH in acquisitions, buybacks & dividends than it has taken in.

It's effective a monopoly, and has a toll-booth type model (exchange model) so customers have no alternative. (For example: It's a monopoly in the Australia.) More to the point - not a single customer left due to recent allegations.

Goldman Sachs, Credit Suisse and Davis Polk & Wardwell LLP have been through EBIX's books AFTER the allegations of Copperfield and GothamCity surfaced and still chose to buy it for $20/share.

 

For one to believe that EBIX will survive, one must:

 

First and foremost believe that the short thesis is largely specious and self-serving piece of drivel.

Believe that Goldman, Credit Suisse and David Polk know more about EBIX than a certain Daniel Yu (Did you read his last "report" ? He forgot to correctly place decimals and convert currencies and blamed EBIX for inaccuracies).

Believe that Raina (who by all accounts, knows the most about company) is dumb in choosing to INCREASE his stake in the buyout rather than take (the money) $20/share and run.

 

 

Today, you aren't even paying $20/share! You're paying about HALF that. The upside if EBIX manages to survive is HUGE. Think about where this company will be in 5 years if it gets by with a slap on the wrist. A slap is easy to bear when you're paying 5-6x FCF and when you have $50M in NOLs.

[siddharth18]

I was reading about a company that's located in Europe that bore an eerie resemblance to EBIX. It's called "CEGID Group S.A."

 

 

 

It started as a management software for CPA firms in France. Then it expanded into other niches such as taxation, treasury functions, and financial reporting....then into branded, modular enterprise management software suites that encompass human resource management, merchandise management, procurement, logistics, loyalty program tracking.

 

 

Today, Cegid has an installed base of more than 95,000 customers, spread among eight business lines and comprising companies of every size.

 

 

Half of Cegid's sales consist of recurrent revenue, and the transition to SaaS among its installed customer base is growing fast. Cegid's competitive position relies on that combination of specialization, customization and installation known collectively as "switching costs". The uncertainty is in the original sale; after that, the customer is, more or less, locked in. Switching from one product or provider to another has costs – in re-training, disrupted systems, installation fees, and so on – that, unless Cegid makes a catastrophic mistake or is resolutely unresponsive, won’t be borne quickly or easily by its customer base.

 

 

Although Cegid has grown at a reasonably brisk pace over the past ten years, there is, I think, no particular reason to believe that it must grow – despite management’s wish that it continue to do so. Indeed, because of the effectiveness of switching costs as a barrier to entry in the enterprise software space, most of Cegid's growth has been acquired rather than organic.

 

 

 

Source: http://quinzedix.blogspot.com/2012/07/normal-0-false-false-false-en-us-x-none.html

[Phaceliacapital]

Interesting, thanks for mentioning.

[meiroy]

 

siddharth18,

 

You have been following the stock for awhile... does that look like the start of a slow squeeze?

[siddharth18]

 

siddharth18,

 

You have been following the stock for awhile... does that look like the start of a slow squeeze?

 

Hah not just follow...I'm obsessed with it :P

 

I really don't know the answer to that although everyone it's common knowledge that the short hit pieces have been lousy at best, yet it's the highest shorted stock in Nasdaq with over -40% borrow rebate rate.

 

Here's a fact to consider:

 

Between June 28th and September 30th, the short interest went from 10.5 million shares to 16.5 million shares. During that period, stock remained below the $12/share range. Which implies that once the shares go over $12/share, almost 40% of shorts are going to be under water! Also note that the rise in price has been on a low volume which means it ain't gonna be easy to cover those 6 million short shares easily that are under water in case the rise in price is either due to:

 

 

1. A self fulfilling prophesy implied by rising prices that the short thesis is weak/invalid  OR

2. Some/Extremely good news that attracts new buyers (those that were waiting for some type of outcome before buying) and the shorts to cover simultaneously.

 

Finally, I will say that no part of my thesis relies on holding my breath for a short squeeze. It may happen, or it may not. If the reaches my expectation of fair value by a short squeeze, or by dismissal/settlement of lawsuits or the closure of DOJ inquiry by the means of a slap on the wrist, it won't matter to me. Even if nothing happens between say - now and 3 years - the shorts will get tired of paying 40% annually, the company will be sitting on a huge pile of cash and/or buyback.

 

 

I used to own OUTR (formerly Coinstar) and the short interest was huge. There were these semi-annual panic selling bouts in the last three years from $60/share to high $40/share. People kept waiting and waiting for a short squeeze - it didn't happen. The lesson I suppose is that one ought to base their buying and selling decisions solely on their estimation of intrinsic value and not by synthetic intricacies of the market such as a squeeze.

 

 

 

That said, do you think this is the beginning of a squeeze?

[mankap]

Craig Hallum had a note out today saying that Ebix is likely to settle with IRS soon.

I think the recent run up has been a result from the news.

[siddharth18]

Craig Hallum had a note out today saying that Ebix is likely to settle with IRS soon.

I think the recent run up has been a result from the news.

 

Hmm? Do you have a link/source here? Definitely would like to know more!

 

I know a lot of momo players jumped into this yesterday/today hoping for a "breakout" leading to the "squeeze."

[mankap]

It is on the bloomberg terminal today. You need to be a member to access it.