Optionable: Bounce Not Forthcoming

May.10.07 | About: Optionable, Inc. (OPBL)

I am going to take a minute just to post some quick thoughts on Optionable (OTCPK:OPBL). First, it goes without saying that yesterday’s action is the reason why I sold the stock on the heels of the BMO news. As a trader or an investor, you simply cannot open yourself up to a potential 35 percent loss on news that is reasonably predictable. Sure, the stock used to trade at $9 per share, but that doesn’t matter. What matters is that the fundamental outlook for this company completely changed.

Second, for the people who can’t seem to understand why OPBL is down so much, you should bear in mind that there are three factors at work here: 1) price decline due to expected earnings decline; 2) margin contraction due to revised growth prospects; and 3) price discounting due to the lack of credibility of management.

On the topic of earnings decline, it is not so simple to say that a 30% decline in revenue will equate to a 30% decline in EPS. In high margin businesses, EPS increases by more than revenue, and by definition, it must fall more than revenue when revenue falls. This is because operating expenses will be a greater percentage of revenue. Leverage to the bottom line cuts both ways with high margin companies, so a 30% revenue decline will probably cause earnings to dip by about 50%. However, this does not include any counterparty risk, and it appears from the conference call that Optionable has at least some counterparty risk with BMO’s trades. So it certainly isn’t out of the realm of possibilities that Optionable’s earnings could decline 60% or more from last quarter.

Second, the loss of BMO’s business has called into question the growth prospects for this company. Not only was BMO a large part of revenues, it was historically getting more important as a percent of revenues. This means that BMO was largely driving Optionable’s past growth, and that without BMO, growth would have been much slower. Given that the stock was already priced at a very aggressive multiple of 55, there is a lot of room for multiple contraction here.

Finally, Optionable’s management has completely lost the trust of the investing public in their handling of the BMO crisis, and they deserve to be blasted for allowing this charade to go on without actually leveling with investors. The company was less than forthcoming about the BMO issue on the conference call, as they declined to say that BMO was still trading with Optionable and only stated “nobody has pulled the plug on us.” This was simply a lie of omission, because Optionable declined to state whether BMO was actually still trading despite the fact that they could obviously see BMO’s trading activity had been curtailed.

In addition, the resignation of Mark Nordlicht without any explanation raises some serious questions, especially surrounding the relationship of Optionable with Platinum Energy (Mark Nordlicht’s company). Should we be putting any trust in OPBL’s recent announcement that they had 11 percent of the crude oil options market? Nobody knows for sure, but who’s to say that those numbers weren’t generated exclusively by Nordlicht’s company. Given the suspicion swirling around the BMO/David Lee scandal, it certainly doesn’t appear to be beyond the realm of possibility.

Overall, Optionable will very likely suffer a huge earnings shortfall due to BMO, and the stock was already priced as a very expensive growth stock. It is not quite so simple as to shave 30% off of OPBL and declare the damage priced in. I don’t know where this situation will eventually shake itself out, but OPBL still doesn’t appear to be cheap given the many uncertainties surrounding the company.

Given the way management has handled the situation up to now, I think that we need to see someone step up and take responsibility for this company’s recent woes in order to restore the credibility of the company. Until that happens, OPBL has very limited upside between now and its second quarter earnings.

OPBL 1-yr chart


Disclosure: No position in OPBL.OB