It is amusing to watch the short position getting piled up at the Ebix, Inc. (NASDAQ:EBIX) counter, at the last count it has reached more than 40% of the floating shares of the company. Let's check the possible reasons behind this bearishness and decide whether to join the party or not.
Ebix ran in to trouble in the last few years and its share price suffered big drop in various bouts of sustained selling. The shares of the company touched a multi-year low in 2013 before making a comeback later. (Insert price chart here)
Class-action suit and its aftermath
A class-action suit filed in 2011 alleging lack of accounting control and false public filings by the company was finally settled in June 2014. Even though the company refused to admit any wrong doing, it agreed to a settlement of $6.5 million to avoid further litigation. The settlement made only a dent of $0.10 to $0.15 on per share basis.
In 2013, Ebix had faced allegations of possible money laundering and hiding of a $65 million loan to its Singapore-based subsidiary.
Meanwhile, a Goldman Sachs (NYSE:GS) affiliate had made an offer of $20 per share for the company and the Ebix management was planning to make it a private company. But the plan fell through as U.S. Attorney for the Northern District of Georgia initiated a probe against Ebix. Allegation of money laundering soon followed this setback for Ebix and a federal investigation was believed to be conducted against the company, as per a report by Bloomberg.
Bears had earlier enjoyed many rounds of success while shorting this scrip and they conducted the bear raids with much elan, making successful raids into the bull camp. The stock had a fall of more than 40% in 2012-2013. It seems, they are now hoping for a repeat, going by the huge build up in short-position in Ebix shares.
When we dig in to the business model and the fundamentals of Ebix, we may wonder whether the Bears may suffer loses this time. The company had made a few acquisitions in the recent months to deepen its engagement in the various verticals in insurance sector. The company has a solid business model and its products are well entrenched in its clients' day to day business operations. Yet, that part of Ebix never deterred the Bears from the shorting the stock.
And a price range of $18-$20 seems to be a big hurdle for this stock as it had fallen off from there, many times in the past one year. Bears may be encouraged by this. May be the earlier offer by Goldman Sachs of $20 per share might have created this line of resistance.
Beaten but not out
The probe from various agencies into the affairs of Ebix and its promoters were on the basis of allegations in the class-action suit filed in 2011. Now the class-action suit is settled and most of the probes haven't made much headway in proving any wrongdoing. But the apprehensions regarding the management quality and the promoters haven't gone away.
The company is cash rich and is not at all weighed down by debt. It is looking forward to acquire more companies in related verticals to reach the goal of becoming leading provider of back-end transaction in the global insurance industry.
It may not be safe to assume that the worst is behind for the company, considering the conviction shown by the Bears. But, after the huge selloff witnessed in the last two years, value is visible in terms of cash and earnings ratios. Value hunters may start considering this company as a possible investment. Unless new evidence emerges against the company's management and its promoters, there is no money for the Bears on this stock.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.