The Rubicon Project: Who Is Selling and Why It's Creating a Bargain Price
- By Shadowstock
If profit is the investor's motive, why or who sells a stock worth a dollar 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 for a stock's inefficient price. The financial entity's investment charter often drives irrational buying and selling.
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The intrinsic value of RUBI
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 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. So 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 once said.
This brings me to an oversold idea, The Rubicon Project (RUBI). It fell victim to institutional selling based on growth attribute noncompliance. Rubicon's sales growth missteps forced its original institutional base to sell. Also, recent brokerage sentiment reinforced that Rubicon 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 down 60% in its 52-week price change. Rubicon's favorable exceptions ignored by selling growth institutions include a 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 has drifted 15% higher over this past week to close on Friday, June 16, at $5.55. Rubicon still warrants a closer look.
The Rubicon Project (RUBI) 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 30% year-over-year decline in revenue. The revenue decline is the direct result of Rubicon's slow transition in changing 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. 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. Further, R&D spend over the trailing 12 months is at a historical high since the 2014 IPO, showing its commitment to any industry's technology shifts.
Barrett's industry reputation is for cleaning and selling businesses. Before Barrett's arrival, Rubicon was for sale. In 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 around a possible Rubicon sale continue.
Long: The author is long The Rubicon Project.
This article first appeared on GuruFocus.
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The intrinsic value of RUBI
