Ebix, Enron, Ethereal and Exposed
Charlie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I look for stampedes these days. After a profitable post-stampede watch and wait session with Apple (NASDAQ: AAPL) followed by a near miss recently as APPL stopped short of my $440/sh limit, I saw another with Ebix (NASDAQ: EBIX) just recently. This market, still in Bear Country in my view, seems tailor made for individual stock panics driven by at best nothing, and at worst goofy reverse logic. APPLE goofy reverse logic: AAPL has too much cash on hand and has a serious problem getting it back to shareholders, so it must be punished and devalued. Huh? cash is bad, sitting on APPL stock long term for its nice dividend and future cash hoard deployment is dangerous....I will take that proposition every time. However, for EBIX the essential question seems to boil down to: Can an unsubstantiated claim of "Accounting Fraud" destroy a company valuation for more than a few days. The real crux will be if the charge is rooted in truth, facts, and gets more than assertions to support the charge.
Just one look at volumes and price drops confirms for me the panic stampede in EBIX: Daily average of 470k sh, recent volumes over 3.2 MM sh, with only 37 MM sh outstanding. High short interest, over 40% by some accounts, and high institutional ownership- 80+% This looks like a short speculative assault. Confirming a substantive reason for the panic however, takes more than one look. In fact, I can't seem to confirm from all the chatter if there is any substance at all to the Accounting Fraud claim. I actually (unlike some of the writers and commentators) READ the spark that set this off, a 40 odd page report by Gotham. It has more than enough specificity and detail to allow some smart accounting type who knows EBIX to rate the charges as credible or incredible. There is sufficient detail for me to recognize that I do not have the contacts, knowledge or background to get to the facts. Most troubling is nobody has done this, as far as I can check. Instead, there is lots of fury and flurry over who is Gotham, what their reps are and what EBIX has to say. This accomplishes NOTHING! How about some substance and fact checking?
The only thing EBIX has in common with ENRON is the "E", oh, and maybe a well hidden accounting conspiracy. I'd remind everyone that ENRON managed to hide their crooked E methods and get big 8 accounting geniuses to sign off on obvious fraud cloaked by related party transactions. I worry similarities exist with EBIX in denying the obvious, aided and abetted by less than genius research that failed to follow up on RELATED PARTY TRANSACTIONS! So, are the "findings" of Gotham ethereal and nonfactual or are they EXPOSING the actual practices that iceberg-like doom EBIX? Seems to me that someone who understands EBIX's business better than I do, and unlike me, has an actual accounting degree, could check this out with some simple research and fact following. It would be especially simple for someone in Australia, where one of the detailed "fraud allegations" is located,
EBIX at low P/E - 7 or 8 and possibly attractive yield, now 2.1% but perhaps 3% if there is a raise in dividend, fits my profile for What I like to call "Secular Bear Fishing". But not if those good looking earnings are faked and "cooked". I will, rather, wait for The Bear to beat up, large, cash full, and good yielding stocks like Intel (NASDAQ: INTC) or Ford (NYSE: F). I don't have to guess or do my own research over some strange unchecked fraud charges with these giants because the world would be all over any scandals. They have far too many shares to make unsubstantiated short attacks likely, or if they happen, I pick up great buys and get rewarded long later. Yes, I miss out on the stunning gains if a later rebound drives prices higher in stocks like EBIX, but I also miss out on the crazy rumor driven volatility, and the possible disaster when arcane analysts are proven right. Of course, I occasionally remind myself that the ENRON giant looked like this as well, and lots of smart people failed to find their frauds until the insider talked.
Getting the EBIX reports from ethereal to fact-checked exposure is critically important to me BEFORE I make big bets. I can afford to buy a lot more F under $10/sh and INTC under $19/sh for the cash I might lose in a big chunk of EBIX after it proves to be cooking the books. I just need to practice Patience for F and INTC to get there. Impatience has always been my biggest flaw as an investor, and jumping on EBIX without knowing the veracity of the Gotham accusations would be way too typical of my previous disasters. "A man's got to know his limitations" - Dirty Harry. More to the point, an Investor has to know his flaws.
SkepikI has positions in AAPL, F, and INTC. The Motley Fool recommends Apple, Ebix, Ford, and Intel. The Motley Fool owns shares of Apple, Ebix, Ford, and Intel. 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!