Thursday, June 5, 2014

* EBIX - "A Fraudulent Sham," or Legitimate Company? Either Way, Option Market Reads: Risk... Now.

Share on StockTwits

EBIX is trading $12.89, up 1.3% with IV30™ down 5.8%. The Symbol Summary is included below.

Provided by Livevol

This is a follow up to a story I posted more than a year ago:

EBIX - Stock Collapses; Vol Explodes on Accusations of Accounting Sham. Option Market Says We are not at Equilibrium.

From the above story:
The news is simple – accusations of accounting fraud. In fact, the term “sham” has been thrown around. Gotham City Research LLC has claimed in a note that the company’s “accounting is Unreliable, Inaccurate, and Incomplete,” its “tax strategy is a sham,” and its stock “deserves to be Halted” per a Barron’s article.

Yesterday, EBIX stock dropped, but even more abrupt was the implied volatility rise. The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).  Here's the Symbol Summary from yesterday's close.

Provided by Livevol

The stock dropped 14.6%, but the implied volatility (the forward looking risk) rose nearly 74%.  And what was the news?...  Here you go:

Ebix, Inc announced that it is continuing to look at acquisitions of all sizes as it builds its portfolio of industry leading software solutions.

Ebix's amended Credit Agreement allows the Company to make two named acquisitions in international markets that total up to $58.5 million (including Healthcare Magic acquired by Ebix on May 27th) through the term of the Agreement, which is in effect until April 2016.

The Company believes that while its cash reserves and operating cash flow is sufficient to fund these acquisitions, it is looking to secure a new credit facility with additional flexibility and improved pricing, to fund any other acquisitions beyond this basket that the Company might identify.

Source: GlobeNewswire via Yahoo! Finance Ebix Updates Its Acquisition Strategy

So , why does that matter?... Actually, as it turns out, when you look at prior fraudulent companies per the SEC (AAER's: Accounting and Auditing Enforcement Releases), overly acquisitive behavior is a part of the fingerprint of fraud.  It doesn't mean that M&A is fraudulent, it doesn't mean that EBIX is fraudulent, but it is a fact that overly acquisitive behavior does have a positive relationship with prior fraud cases.

How do I know that?  I am a part of the team that built the most widely recognized fraud model in the world called AGR (Accounting and Governance Risk), through Audit Integrity, LLC (now a part of a conglomerate called GMI Ratings).

Anyway, back to EBIX...

The three-year stock chart is included below.

Provided by Charles Schwab optionsXpress

The stock has this incredible tendency to go up and down in huge amounts, with the downside moves a bit shorter in time frame (sometimes one-day gaps).  EBIX has started another downtrend (or, really, is in the middle of another down trend) and the risk has not been lost on the option market.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

As stated prior, the implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days). Note that EBIX volatility is spiking (or it did yesterday).  The trend in the stock price is also pointing to the potential of those very low-lows of sub $10 stock price.

The question is, has the option market priced in enough risk for this firm, or is there more than meets the eye?  I suppose a second question could be, is the volatility too high, is this much a do about nothing?

We can see exactly how much risk is priced in by looking at the Options Tab below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$11.30, $14.70].
  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaim any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.

No comments:

Post a Comment