Anatomy of a Trade: A Solid Gain For A Very Frustrating Trade


When 4.45% over two weeks hardly feels worth it.

As The Fund uses short-term trading strategies, we are usually thrilled at 2% gains per week.  In late June, we noticed a large drop in the stock price for Ebix, Inc. (EBIX).

The Setup

June   19, 2013:
EBIX   closes at $19.72.
June   20, 2013:
EBIX  closes at $11.00 after trading as low as $9.85 on almost 100x volume of the last few trading sessions on news that the pending acquisition by Goldman Sachs was terminated due to shareholder lawsuits and government investigations over accounting and disclosure issues.
June   21-24, 2013:
EBIX   continued to drop after trading as low as $8.21 on June 21 and closing at $9.25 on June 24.

The Trade

Having fallen over 50%, we decided to jump in.  We entered the trade on June 25, 2013 at $9.78, and it closed at $10.00 that day.  Great, right?  Well. . .

EBIX proved volatile.  Although we believed it was due to increase (obvious, since we bought it), it slipped well below our trading price, trading as low as $9.25 on June 28.  We were not thrilled, to say the least.  We believed in our thesis, but the market was not cooperating when it should bend to our will!

Thinking back to our InnerWorkings trade, we hung in there.  Other commentators seem to agree with us, even when downgrading the stock. downgraded EBIX for these reasons:

  • The revenue growth came in higher than the industry average.
  • Ebix’s debt-to-equity ratio is very low at 0.20 and is currently below that of the industry average, implying that there has been very successful management of debt levels.
  • Ebix had an adequate quick ratio of 1.44, which illustrates the ability to avoid short-term cash problems.
  • Ebix has improved earnings per share by 12.5% in the most recent quarter, although it did anticipate underperformance going forward.

So why was it downgraded?  Its stock price fell.

Of course it did!  Its merger (and merger premium) went away, and it was the subject of government investigations and shareholder lawsuits!  This part is easily explained.  The real question is where is EBIX going from here, not how did it get here.  A downgrade made sense prior to June 20, 2013, NOT on July 2, 2013!!!! (Please pardon the liberal use of exclamation points.)

Other indications seemed to suggest that EBIX was oversold.  After comparing Ebix to the Hewlett-Packard/Automony debacle, one commentator seemed to agree.

The Result

EBIX managed to claw its way back up, despite some serious volatility and closed at $10.08 on July 9, 2013.  On July 10, 2013, with EBIX trading around $10.25, we were stopped out at $10.21 for a 4.45% gain over two weeks.  It was a rocky road, but it had a good ending and we are relieved to be out, even if we may be giving up some future gains.

Since February, as of this writing, we are up 70.68% of invested capital and 46.13%, including reinvested gains/losses.

Note: We have no further position in EBIX and do not comment on open trades.

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