The Ebix Shorts Are Wrong, but That Doesn't Mean Ebix is a Definite Winner

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Ebix (NASDAQ: EBIX) has been the subject of attacks from short-sellers for well over a year, with the most recent salvo being fired by "Copperfield Research" on their Seeking Alpha"Instablog." Copperfield Research is a pseudonym to protect the author from "danger of retaliation from company management."

I call that nonsense, and disingenuous at best. 

It's more of a vehicle to help the author avoid accountability for their actions.  Factor in that the anonymous "Copperfield" is disclosing that they are short the stock, stepping out into the light of day and not hiding behind a pseudonym would lend much more credibility to their opinion.  Yet this insistence on hiding their identity makes their already dubious claims even less trustworthy. 

Again, it's not that they are short the stock -- that is a valid, legal, and ethical way to profit.  But doing it behind a mask while putting out incredibly damning, yet nearly impossible to prove, accusations that have little weight to them, is offensive to me both as an investor, and as an investing journalist. 

The first "report" that Copperfield released on Seeking Alpha was published on March 24, 2011.  The chart below shows the immediate impact this had on the share price: 

<img src="http://media.ycharts.com/charts/60f3e23488fc987df382bb22819f4087.png" />

EBIX data by YCharts

That one day gave Ebix shareholders about a 20% haircut, and the share price has never recovered:

<img src="http://media.ycharts.com/charts/dbbc8c204f100ecfb2445aa108d5955b.png" />

EBIX data by YCharts

Even as investors hoped that these short attacks had become a thing of the past, a Nov. 5 article on Bloomberg speculated that Ebix was facing SEC scrutiny, even a looming investigation.  Ebix CEO Robin Raina quickly responded, but the damage was done. 

Shares were pushed down again, giving up another 22% on the week's news:

<img src="http://media.ycharts.com/charts/0ad6cb614be72168892165b7861ca952.png" />

EBIX data by YCharts

So what's a long-term investor to do? Where there's smoke, there's fire, right?

Don't confuse steam with smoke.  The bottom line is that there is minimal evidence that any of the Copperfield Research accusations carry any weight, and it doesn't look like the SEC is about to launch an investigation.  A similar case of nonsensical accusations has been levied at 3D printer maker 3D Systems (NYSE: DDD) over the past few months, but it's more a case of potential (and definite) short sellers taking advantage of aggressive serial-acquirers like Ebix and 3D Systems, and the complications that acquisitions add to accounting, to create the illusion of unethical, or even illegal, accounting practices in order to create short-term opportunities to profit by driving the share prices down. 

So when it comes to the analyses into the accounting practices, one can ignore the shorts, and follow credible research from analysts that don't hide their identities. I personally subscribe to two Motley Fool services that cover these companies: Stock Advisor has recommended 3D Systems, and Analyst Jim Mueller provides great coverage and analysis. Rule Breakers has recommended Ebix on more than one occasion, and Analyst Matthew Argersinger has done a tremendous job in covering the company and giving a balanced analysis.  If you're willing to spend a little money, you can get solid analysis there.  And if you find it not to you're liking, they'll give your money back to you. 

So with that said, the upside for Ebix has always been its goal of consolidating a very fragmented industry through expansion and acquisition.  And with a market cap of under $700 million, there is tremendous room to grow the business.  And in a lot of ways it was quickly becoming the gorilla in the room.  However, if Ebix is the gorilla in the room, there's now an elephant to contend with: ​Xerox (NYSE: XRX)

With over $22 billion in annual revenues, Xerox clearly dominates Ebix in scale. And with its core business in decline due to the growth of paperless technologies, cloud computing, and increased competition, the company has focused, almost in an IBM-esque manner, on shifting to a more services-led approach. The Insurance Exchange business, it seems, is definitely a big part of this shift.  And this makes Xerox a much larger risk than any biased and unfounded accusations of illegal accounting practices. 

Time to sell Ebix and buy Xerox?

Not so fast, and for two reasons:

First off, I think Xerox could be a turnaround opportunity, but with the vast majority of its business driven by annuities tied to its legacy copy equipment business, I want to see more revenues being generated from its profitable software and consulting operations. 

Second, I still see tremendous opportunity for Ebix. As I mentioned earlier, the insurance software business is incredibly fragmented, and through both organic growth and continued acquisitions, Ebix should have plenty of opportunity to grow. Eventually, as long as the business continues to execute, shareholders will be rewarded. 

Now get out there and do your own research to find out if my conclusions make sense for your portfolio.  After all, it's your money, and I'm just some guy with a blog.


elihpaudio owns shares of 3D Systems and Ebix. The Motley Fool owns shares of 3D Systems and Ebix and has the following options: short JAN 2014 $55.00 calls on 3D Systems and short JAN 2014 $30.00 puts on 3D Systems. Motley Fool newsletter services recommend 3D Systems and Ebix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus