Yesterday I analyzed Ebix, Inc. (EBIX) in depth and estimated that the company’s current intrinsic value is somewhere in the vicinity of $30.40. The stock has been decimated recently by bad press, some red flags with respect to whether it can successfully integrate other companies it acquires into the overall business, and a slowdown in earnings growth over the past year. Despite all these warning signs, the stock is trading at just $16.66 currently, which is a 45% margin of safety! I am currently long Ebix and will be adding more to my position at this price level. For tracking purposes, I will also add Ebix to the stockodo portfolio.
Before initiating a new position it’s important to define up front what portion of overall capital is to be invested. Let’s assume that we have a total portfolio value of $200,000 and that we wish to allocate 10% to any one individual security. That means we have $20,000 to invest in Ebix.
The next step is to define an entry strategy. I am tempted to try a strategy involving averaging down to maximize the amount of shares I can buy with available capital, however the stock has been beaten down so much already, that there’s a very good chance it will rebound sharply on any good news at all. This would prevent me from fully entering into the position. To keep things simple, I am going to employ a simple lump sum entry strategy, rather than attempting to scale in. At a current price of $16.66 I am able to purchase 1,200 shares of Ebix for a total investment of $19,992. The commission I pay is $5, so my total cost basis is $19,997.
Related: Value Investing Workflow
It’s also important to define an exit strategy. I will use the company’s intrinsic value to determine when to sell, as I described in another article two weeks ago. Essentially, once Ebix’s price reaches a level 15% higher than its intrinsic value I exit. Alternatively, we also exit (possibly at a loss), if the company no longer meets the criteria that it was screened against. For reference I used my Predictable Growth, Low Debt screen to find this stock. This sets an initial profit target of $34.96 which if hit would net a simple gain of over 108%. Ideally however, both the company’s stock price and intrinsic value will continue to rise in parallel, allowing for much greater profit potential over the long term.