Angie's List At $5: Poised For A Buyout, A Short-Squeeze And A January Effect Rally

| About: ANGI Homeservices (ANGI)
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Summary

Angie's List shares are a compelling value and have multiple upside catalysts.

This stock is undervalued based on rival valuations, revenue growth, and takeover potential.

Angie's List shares have long-term potential as well as short-term potential as the end of tax loss selling and short-covering could create a "January Effect Rally".

Angie's List, Inc. (NASDAQ:ANGI) shares have been quite a disappointment for many investors in 2014. This stock now trades for a mere fraction of its 52-week high of $19.80. However, for a number of reasons, it seems like it is the right time buy this stock as it could be poised for significant gains in the short-term as well as long-term. This company is a leader in providing reviews and other information on contractors, plumbers, painters, auto repairs and many other service providers.

After spiking to about $8.50 in October, this stock has been under pressure (probably due to tax loss selling), however, it has been forming a base around the $6 level which means it could be poised for a rebound in the coming days and weeks (especially as tax loss selling fades).

This company has a solid balance sheet with nearly $80 million in cash and just about $59 million in debt. This financial strength greatly reduces potential downside risks and possibly increases takeover potential. Angie's List recently launched a new mobile app which is getting very good reviews. An analyst at Wunderlich expects fourth quarter revenues to jump 18% and he believes the stock could rise especially since the prior version of the mobile app was a potential issue. A recent article details these views, it states:

"Two weeks ago, the company launched the latest version of its mobile app, which Harper called "the best version of a mobile experience the company has ever created." Harper said more investment is required for the segment, but expects "the company's success to be tied to its mobile experience." A further key for the company, Harper said, is to shift revenue dependence toward transactions through its "shop local services" feature, and away from subscriptions."

CNBC's Jim Cramer believes that Angie's List could be an ideal takeover target, but he feels the company should change its revenue model in order to allow users to access the site for free (and obviously charge for ads). This would probably create a huge surge in the already strong user base and the stock could jump on this type of news as well. I think Cramer is right about this and that the market would reward management for this decision. This model clearly works for Yelp (NYSE:YELP) and its valuation is many times higher. A company like Yelp could decide to make this decision for Angie's List if current management does not, by simply buying the company. A recent Seeking Alpha post details Cramer's comments and it states:

"ANGI has a robust user base, and another tech company could buy Angie's List and revamp it. The review space is hot right now, and Yelp could also be acquired, but it might not want to be taken over."

Yelp has a current market cap of nearly $4 billion and generates revenues of about $338 million. By looking at those numbers, Angie's List is incredibly cheap now because its market cap is just about $343 million and it generates over $300 million in annual revenues (which is not that much less than what Yelp brings in). Plus, analysts expect Angie's List revenues to jump by about 15% from $314 million in 2014 to over $360 million in 2015. If Angie's List were to be revalued to Yelp-like levels, it could be trading for about $50 per share. That presents a tremendous valuation gap that management at Angie's List needs to either narrow or it needs to allow the company to be acquired. Angie's List could be a very attractive takeover target based on its ridiculously low valuation for a number of companies, including Yelp, or the highly acquisitive, IAC/InteractiveCorp (IACI). For Yelp, it seems to be a perfect fit as both are in a similar line of business. Plus, if Yelp can use its highly valued stock that trades for several times its annual revenues as a currency to buy a company that trades for just about 1.1 annual revenues, it's a great way to grow fast and pick up cheap assets.

A potential takeover seems even more likely because Angie's List recently announced it hired an investment banking firm to review strategic alternatives which could include the sale of the company. A Benzinga article details this news and points out why Angie's List could be an ideal takeover target (It also brings up the idea that Angie's user base could surge if the site changed to a free for consumers business model that charged for advertising. The article states:

In the report, Wunderlich Securities noted, "This week it was reported that Angie's List, Inc. hired an investment bank to explore strategic alternatives, including a potential sale of the business, which led the stock to rise 20% for the day. We believe a potential buyer could create substantial value from Angie's List's assets of user generated reviews, it's data on local service providers, and advertising relationships with 51,000 service providers. We also would expect potential acquirers to look to expand Angie's 2.8 million membership base by eliminating the paywall to create a larger marketplace for consumers and service providers. We believe there is still more value in the stock and a potential acquisition could get the stock to our $13 price target sooner, which represents 2x EV/S."

As the data below shows (sourced from Yahoo Finance), multiple insiders have been buying this stock throughout much of 2014. This is a sign that insiders see value and it is also nice to know that top executives and directors have their interests aligned with shareholders.

Insider Transactions Reported - Last Two Years
Date Insider Shares Type Transaction Value*
Nov 17, 2014 CHUANG JOHN H.Director 3,400 Indirect Purchase at $6.11 per share. 20,774
Nov 17, 2014 TRI VENTURES, INC.Beneficial Owner (10% or more) 3,400 Indirect Purchase at $6.11 per share. 20,774
Nov 17, 2014 KAPNER STEVEN M.Director 3,400 Indirect Purchase at $6.11 per share. 20,774
Oct 27, 2014 MAURER MICHAEL SDirector 15,000 Direct Purchase at $6.56 per share. 98,400
Oct 15, 2014 KAPNER STEVEN M.Director 2,532 Indirect Purchase at $8.18 per share. 20,711
Oct 15, 2014 TRI VENTURES, INC.Beneficial Owner (10% or more) 2,532 Indirect Purchase at $8.18 per share. 20,711
Oct 15, 2014 CHUANG JOHN H.Director 2,532 Indirect Purchase at $8.18 per share. 20,711
Sep 15, 2014 CHUANG JOHN H.Director 2,663 Indirect Purchase at $7.78 per share. 20,718
Sep 15, 2014 TRI VENTURES, INC.Beneficial Owner (10% or more) 2,663 Indirect Purchase at $7.78 per share. 20,718
Sep 15, 2014 KAPNER STEVEN M.Director 2,663 Indirect Purchase at $7.78 per share. 20,718
Aug 28, 2014 CHUANG JOHN H.Director 2,688 Indirect Purchase at $7.71 per share. 20,724
Aug 28, 2014 KAPNER STEVEN M.Director 2,688 Indirect Purchase at $7.71 per share. 20,724
Aug 28, 2014 TRI VENTURES, INC.Beneficial Owner (10% or more) 2,688 Indirect Purchase at $7.71 per share. 20,724
Jul 28, 2014 MAURER MICHAEL SDirector 12,000 Direct Purchase at $8.15 per share. 97,799
Jul 28, 2014 BRITTO MARKDirector 25,000 Direct Purchase at $8.18 per share. 204,500

As detailed above, the longer-term potential for this stock could be driven much higher due to the low current valuation and the options this company has from the strategic review which could even lead to a sale of the company. Long term upside could also benefit from a possible change that would allow free usage of the site. The strong balance sheet and the fact that analysts expect this company to post revenue growth also improves the long term outlook. There are some short-term upside catalysts as well:

Angie's List shares could be poised for a Santa Claus and January Effect Rally. Buying depressed stocks while there is tax-loss selling pressure can lead to strong gains in the last week or two of December in what is known as the "Santa Claus Rally". This year, Friday December 19, will be the last trading day before the holidays begin for many traders and investors. That means much of the tax-loss selling pressure could fade sooner than many investors realize. If this stock is trading for nearly $6 while it is probably experiencing heavy tax-loss selling, it will probably be able to trade for much more when this temporary excess supply of stock comes to an end. It could also see a rebound in a "January Effect Rally" which is typically caused by bargain-hunting investors and short-covering. Many shorts have made solid gains in this stock. However, since it is so close to 2015, many shorts are likely to want to wait just about two more weeks so that they defer paying taxes on those gains for another calendar year. According to Shortsqueeze.com, nearly 10.6 million shares, which is equivalent to about 20% of the float, is currently short. With tax-loss selling fading by December 19, and with the potential for shorts to cover in early January, this stock could be poised for a major rebound.

Here are some key points for Angie's List, Inc.:

  • Current share price: $5.89
  • The 52 week range is $5.55 to $19.80
  • Earnings estimates for 2014: a loss of 25 cents per share
  • Earnings estimates for 2015: break-even results
  • Annual dividend: none

Data is sourced from Yahoo Finance. No guarantees or representations
are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial
advisor.

Disclosure: The author is long ANGI.

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.