Ebix Added to Model Portfolio

red check markYesterday 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.

Position Management

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.

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5 thoughts on “Ebix Added to Model Portfolio

  1. Dustin Small, I am a trader and want to add some more companies in my investment portfolio in 2013 that’s why continue observing you company analysis. I am interested in Amazon. It will be more helpful for me, if you share some useful details about this company. It also will help me to take a final decision to add this in my trading portfolio or not.

    • Dustin Small says:

      Hi Shawn, I haven’t spent a lot of time looking at Amazon, because while I believe it to be a great company, it’s a terrible investment in my opinion (extremely overvalued).

  2. I took a look into this stock thanks to one of your previous postings. I wasn’t able to find a way to trade it but none the less I was happy to be introduced to it.

    When I meet novice investors they try and jump on every stock they see in front of them. The sad truth is you are only one man (or woman) and can only efficiently cover so many stocks before your analysis starts to degrade. (In my opinion of course)

    • Dustin Small says:

      Yes, I have come to the same realization. I feel it’s better to know 10-20 companies really well than it is to have a mediocre understanding of 200. This is especially true when buying on the way down – you need that confidence in the company to be able to pull the trigger.

  3. Dustin Small says:

    Ebix announced today that they are being bought out and will be taken private by GS. Now virtually guaranteed $20/share minimum, but there is a 45 day period where EBIX can solicit an even better deal, hence the small premium in current trading. I am hanging on for the moment to see if a better deal can be found.

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