If profit is the motive of investors, then why or who, sells a stock worth a dollar for 50 cents?“
Ignorant households” Who Have “Failed To Behave Rationally” Help Rally Continue
This is an enormous and exciting topic.
Let’s revisit Charlie Munger’s sage advice:
think forwards and backwards – invert, always invert
Focus your efforts capitalizing on overlooked yet simple investing techniques.
Why bargains exist is too vast and intricate a topic for complete coverage in a blog post.
Instead, the one significant driver of this price inefficiency is due to rule-based institutional transactions. It’s often the catalyst of inefficient prices.
The financial entity’s investment charter often drives irrational buying and selling.
Who (or Why) Sells a Dollar for 50 Cents?
The topic of who sells a dollar for 50 cent can include overreaction to changing fundamentals, drop in stock value (fear/greed), career risk, liquidity requirements or a financial institutions’ investment charter.
An investment charter includes style (growth, value, market size, specialty) that, if violated, the stock is sold regardless of positive exceptions. There are over 7,000 mutual funds, near 2,000 ETF’s and approximate 11,000 hedge funds.
The investment behavior of these institutions cover a large part of the buying and selling volume. This activity creates short and medium term buying or selling opportunities.
Investors can exploit these price inefficiencies.
There’s only one reason a share goes to a bargain price: Because other people are selling. There is no other reason. To get a bargain price, you’ve got to look for where the public is most frightened and pessimistic. – Sir John Templeton
Loose Financial Conditions Have Forced Fed To Shrink Its Balance Sheet
The Rubicon Project (RUBI)
That’s where The Rubicon Project (RUBI) comes in. They sell a technology solution to automate the buy and sale of a wide range of advertising units for buyers and sellers.
It fell victim to institutional selling based on growth attribute non-compliance. Rubicon’s sales growth missteps forced their original institutional base to sell.
Also, recent brokerage sentiment reinforced RUBI is no longer a growth story – at least in the short term.
At first, value institutions sat on the sidelines.
But, they are trickling back.
No credence is given to Rubicon’s beneficial exceptions. Or, the mean reverting -60% 52-week price change.
Rubicon’s favorable exceptions are ignored by the growth institutions that are selling.
Positive points like:
- strong financial position with $3.88 per share in cash
- no debt
- positive cash flow
- high gross margins versus the current $5.55 price or $1.77 enterprise value per share
Last week on June 7th, the stock closed at $4.69, 68% off its 52-week high of $14.79 and 75% from the all-time June 2016 high.
The stock has drifted 15% higher over this past week to at $5.55.
RUBI still warrants a closer look.
Valuation Summary
Here are the various numbers I look at with my short notes included.
Relative Valuation
Rubicon’s stock price crashed 60% over the past 52 weeks.
The price drop relates to the YOY 30% decline in revenue which is a direct result of Rubicon’s slow transition to change its advertising technology as customers shifted towards alternatives. But, the board quickly addressed revenue decline.
CEO and co-founder Frank Addante was replaced by an industry veteran Michael Barrett during March 2017. Addante will stay on the board as chairman and founder. Before Barrett’s arrival, Rubicon laid off around 19% of its workforce or 125 employees including senior management at the end of 2016.
Furthermore, R&D expenditure over the TTM is at a historical high since the 2014 IPO, showing their commitment to any industry’s technology shifts.
Barrett industry reputation is for cleaning and selling the business. Before Barrett’s arrival, Rubicon was for sale. January 2017, The Wall Street Journal reported that Rubicon Project “is exploring strategic options, including a potential sale, with the help of Morgan Stanley.
After Barrett’s recent arrival he stated: “the company is not for sale” but industry rumors continue around the possible Rubicon sale.
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Disclosure
Shadowstock is long RUBI.
This article was originally published on ShadowStock and is reprinted here with permission.
Article by ShadowStock, Old School Value
About the Author
Shadowstock’s goal is simple. The persistent pursuit to uncover and share the best ignored investment ideas in the tradition of Graham and Dodd. My academic experience includes a degree in both Accounting and Investment Finance from Baruch College, New York City. Professional experience covers responsibility for financial systems development/management coupled with financial controllership and analysis at Fortune 500 companies. Health issue forced me to leave. My investment posts are nonprofit.
"There Are No Bad Assets Just Bad Prices"
