Dex Media (DXM) has traded down 11 of the last 12 trading days, and 18% from its recent highs of $13.74. Has this weakness been driven by a negative fundamental development?
In short, the answer is no. The company posted a great 2Q (12% plus digital ad sales growth). The improvement in fundamentals is also reflect in the performance of the bank paper-at 84, it is at near all-time highs while the stock is 50% off its all-time highs.
- Remember, the bank debt smells fundamental change way before the stock does, and it has been rising since 8/18.
Figure: Bank debt has been rising since 8/18, while the stock has fallen...
So then, why has the stock been weak? We can point to 3 potential factors, all of which, are transitory:
#1: The 6/30 13F filings shows Kyle Bass has sold his shares.
And no doubt, a lot of weak hands may be following him out. But why would Kyle sell? While we do not know the exact reasons, we believe Kyle may have been embarrassed about the press coverage around the 2014 SOHN conference (May 2014) and about the performance of his #1 pick from the 2013 SOHN conference . At the time the media ran the stories (May 2014), DXM was $8-$9 and it is reasonable to think he wanted to "wash his hands" of the name. Does his sale change anything about DXM? Absolutely not. In fact, look at the bank paper, which was $79 during his sales and is now at $84.
#2: The selling started on the day of August 2014 options expiration.
There was a massive long position on the $12.50 calls (2.0mm shares, or 20,000 contracts-plus) and because these were in the money, there seemed to be liquidity problems around the settlement. For much of Friday, the August $12.50 calls traded below intrinsic value, meaning the call was worth less than actually value if it was exercised. This should not happen on expiration day (it is a dealer market and dealers are supposed to prevent this). As a consequence, we believe it is possible a large portion of those contracts were exercised and the call holder ended up being long the stock. And if so, it is possible these shares have been bleeding into the market since. The stock has been down 8 of the 9 trading days since (11 of 12 since its peak).
#3: Short interest has soared recently, rising from 250,000 to 5.2mm shares in the latest reported period (8/15) and we believe it is even higher since.
The sheer volume of the selling increase has weighed on the shares. Again, the bank debt is telling a completely difference story from the equity.
Why we believe the stock is about to turn sharply higher…4 reasons
We believe the stock is reaching a very buyable entry point. Foremost, the factors we note above are merely transitory and do not have self-reinforcing momentum. But here are the reasons we think the stock can turn higher in the short term:
#1. We believe another tender for debt is around the corner. The company ended with quarter with $146mm in cash and we estimate that $30mm-$40mm is unencumbered. The company has done 7 tenders since 2010. As shown below, the average stock gain has been 43% following each tender. The most recent tender in June saw the stock jump 19% in a few weeks.
Figure: Stock gained average of 43% following each tender...
- Why would the stock rise? Consider the debt reduction taking place cumulatively. The company's debt balance has decreased cumulatively by $159mm since the start of the year (6 months), resulting in annual interest savings of $17mm, or $1 per share in FCF ($2.00 annualized) and the par value reduction is $9.35 per DXM share ($18.70 per DXM share annualized).
#2. The daily RSI is oversold and as shown below… has been a good entry point, 3 of the last 3 times it was this oversold...Take a look at the figure below. The current RSI is 33 and notice it was 33 or lower only 3 times since 2013. In each case, this represented an excellent entry point, resulting in a stock price rise of at least 75% within 3 months.
Figure: Daily RSI oversold this much only 3X since 2013...each time a VERY RELIABLE BUY SIGNAL
#3. We believe a YELP (NYSE:YELP) deal will happen within the next 4 months. Let's not forget that the company has alluded to a potential deal with a social media company. Again, there is precedent for this, as YELP has struck a deal with YP.com and the footprint of DXM is complementary. The positive for the equity is that investors will see DXM as more relevant with a social media partner. And importantly, would be another factor to support improving equity valuations. With FCF projected to be $20-$22 per share in 2014, the stock is trading at 0.5X P/FCF-that is a preposterously low valuation.
#4. MACD daily histograms are about to reverse… historically a very strong buy signal for DXM with gains averaging 100%…Finally, take a look at the MACD "difference value" It has finally begun to contract and this has happened 2X since 2013 (from a similar sized sell-off). The first time (2013) the stock rose from $4 to $10. The second time (2014), the stock rose from $6 to $13. The point is, this is a very powerful signal and another reason we would be buying here.
Figure: Daily MACD histograms are turning up from oversold. Only 2 times since 2013, and each was very good entry point
Source: The Bloomberg
BOTTOM LINE: BUY THE STOCK.
Nothing fundamental has changed in the past 12 trading days. Yet, the stock is down 11 of the last 12 days. (it certainly would be odd for the bank debt to trade well if there was a fundamental problem in the horizon). If it is not fundamental, then it is a liquidity/seller-driven factor, which is transitory.
- Such sell-offs happened only a handful of times since 2013 and it was an excellent entry point for the stock. We would be buyers here.
Disclosure: The author is long DXM.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.