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Bovie Medical - Liquidation Event By Major Holder = Buying Opportuniy

|Includes: Bovie Medical Corporation (BVX)

There are a number of good articles on seeking alpha about Bovie - many of them written by Andrew Stephan. If you would like to get an idea of the business and the potential for Bovie I suggest you take a look at those. In this article I am just going to focus on one thing: A fund liquidation event that I believe has created a tremendous value opportunity in Bovie.

I have had a sizeable position (relative to my assets) in Bovie for well over a year now. My typical investment horizon is 3-5 years and so I am not much concerned with the price of the stock in the near term.

However I do pay attention to short term movements for one reason. If there is a drastic change in the price I revisit my assumptions about my outlook for the business and ask myself are they wrong/does the market know something I don't.

There have been are a number of developments in the Bovie Medical story this year - some positive, some negative. All of these influence the stock price. Major ones include:

  • Bovie did a secondary offering of shares in March at a price of $2.50
  • Bovie entered an agreement with one of their major holders that allowed them to clean up their balance sheet by getting rid of major warrant liabilities
  • J-Plasma sales are ramping up quite a bit (but not quite as fast as management initially projected)
  • Bovie has continued to do a lot of work to build the sales team, and get highly respected doctors involved in commercializing J-Plasma
  • The CFO left to take another job

All of these are well known to the market. My assessment of all of this is that my original investment thesis is still intact and yet the stock has dropped over 40%. Then A thought popped into my head - one possible explanation - someone big is liquidating.

Bovie is an illiquid stock. Value investing 101 says if someone is/has to get out of a big position in an illiquid stock that usually presents a buying opportunity. Now if you believe the liquidator is exiting because their view of the investment has changed that is one thing. But if exiting the position has nothing to do with the fundamentals that is where the value story is likely to be. It is the latter that is happening with Bovie.

With a little sleuthing I found the following: http://bit.ly/1MY3Bq3

This is an article from KPMG published on June 12 2015. It says that the members of Renn Universal Growth Investment Trust decided to liquidate their investment vehicle on Dec 12 2014. They sent a circular to all members of the trust about this on Nov 14 2014.

In the article KPMG notes that as of the date of the circular the value of the company's holding in Bovie was $5.76 Million. The closing price of Bovie on Nov 14 2014 date was $4.05 so this says that on this date they owned 1.42 million shares. By my count that is 5.2% of the company (1.42M/27.2M shares outstanding).

The article from KPMG is an update from the liquidators saying here are the investments we have liquidated in full and here are the ones we have not yet liquidated in full because they are illiquid. They further state that they expect to have made significant progress in liquidating the remainder of their holdings by autumn of 2015. Bovie is one they had not finished liquidating. Here is what I have been able to piece together about points in time and how many shares Renn had left to liquidate.

We start of course at 1.42 million shares as of Nov 14 2014 as per the article above. At this point Bovie was trading at $4.05 per share.

This link http://bit.ly/1MY3Bq5
indicates that as of March 2 2015 Renn Owned 3.91% of Bovie (3.91%*27.2M float) = 1.06 Million

So in 3.5 months they sold 360,000 shares. During this time 1.35 million shares traded (based on yahoo historical price and volume tables). Bovie was trading at $3.40 per share at the end of this period.

This link from yahoo (http://yhoo.it/1MY3Bq7) says that as of June 30 2015 Renn owned 700,000 shares of Bovie

So in 4 months they sold an additional 360,000 shares. During this period there were 7.99 million shares traded. Bovie was trading at $2.79 at the end of this period.

We are now at the beginning of October. Another 3 months have passed and 2.7 million shares of Bovie have traded in this period. If the liquidators have kept the same pace they have sold another 300,000 or so shares meaning there are about 400,000 left to go. As of Oct 7 Bovie is trading at $2.10 per share.

Based on the above numbers it seems that the liquidation plan for Bovie does not really take into account the volume being traded. Instead it seems as though they are essentially targeting the sale of 300-400K shares of Bovie every 3 months. This is consistent with their target of having substantially exited their remaining positions by Autumn 2015. Selling 300-400K shares every 3 months may not be the wisest approach given that Bovie occasionally has very liquid days (in the last year there was one day where volume was over 2 million shares and another where it was over a million). If the liquidation process took into account the liquidity on any given day Renn likely would have been able to exit their position with less of an impact on the stock price. But then there would not be as much of a value opportunity.

A major seller in an illiquid stock always means significant downward pressure on the stock price. During the period of time that Renn has been liquidating the price of Bovie's stock has gone from $4.05 to $2.10. There have been developments in the company in the period - some negative, some positive - but I conclude that one of if not the major driver of the stock price drop has been the liquidation. The fact that most likely the liquidators are not done (best guess they still have 400,000 shares to sell) means there might be more downward pressure in the short term. However at under/around $2 the stock is too compelling to me to pass up and wait to see if it does drop lower. So I have substantially added to my position at recent prices.

Disclosure: I am/we are long BVX.