If profit is an investor's motive, why sell a stock worth $1 for 50 cents?
This is an enormous and exciting topic. Charlie Munger (Trades, Portfolio)'s sage advice is "think forwards and backwards – invert, always invert." Focus your efforts capitalizing on overlooked yet simple investing techniques.
Why bargains happen is too vast and intricate a topic for complete coverage in a blog post. Instead, this post will cover one significant driver of this price inefficiency. Rule-based institutional transactions are often the catalyst of a stock's inefficient price. The financial entity's investment charter often drives irrational buying and selling.
The topic of who sells $1 for 50 cents can include overreaction to changing fundamentals, drop in stock value (fear/greed), career risk, liquidity requirements or a financial institution's investment charter. An investment charter includes style (growth, value, market size, specialty) that if violated the stock sold regardless of positive exceptions. There exist over 7,000 mutual funds, nearly 2,000 ETFs and approximately 11,000 hedge funds. The investment behavior of these institutions covers 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." –Â Sir John Templeton
This brings me to an oversold idea, the Rubicon Project (RUBI). It fell victim to institutional selling based on growth-attributed noncompliance. Rubicon's sales growth missteps forced its original institutional base to sell. Also, recent brokerage sentiment reinforced it 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 ignored by selling growth institutions include the 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. On June 7 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 drifted 15% higher to close at $5.55 on June 16. Rubicon still warrants a closer look.
The Rubicon Project sells a technology solution to automate the buy and sale of a wide range of advertising units for buyers and sellers.
Valuation
Relative Valuation
Rubicon's stock price crashed 60% over the past 52 weeks. The price drop relates to the year-over-year 30% decline in revenue. The revenue decline is the direct result of Rubicon's slow transition to change its advertising technology as customers shifted toward alternatives. But the board quickly addressed revenue decline.
CEO and co-founder Frank Addante was replaced by industry veteran Michael Barrett in March. Addante will stay on the board as chairman and founder. Before Barrett's arrival, Rubicon laid off around 19% of its workforce – 125 employees –Â including senior management at the end of 2016.
Barrett's industry reputation is for cleaning and selling the business. Before Barrett's arrival, Rubicon was for sale. In January 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.
Disclosure: Long Rubicon.
