Value stocks have been underperforming growth stocks and value investors have been hurting. According to Ken French’s calculations growth stocks outperformed value stocks by 16 percentage points since the beginning of 2017. Historically value stocks outperformed growth stocks by an average of about 5 percentage points per year, so the recent underperformance of value stocks is out of the ordinary. This is creating a lot of pain for value hedge funds and investors. Last month $2.4 billion value hedge fund Marble Arch said it is closing down. Bloomberg mocked famous value investor David Einhorn last month in an article titled “Einhorn is Having A Hedge Fund Midlife Crisis” (read my take about Einhorn’s poor performance).
In this article I am going to talk about another value investor, Jim Roumell, who invests in deeply undervalued stocks. Roumell Opportunistic Value Instl (RAMSX) lost 2.5% so far this year but managed to return 18.3% in 2017 and 18% in 2016. Though the fund got crushed in 2015 delivering a loss of 21.2%. I should note that I am not endorsing value investing as the best investment approach in this market environment. Insider Monkey’s flagship investment strategy identifies the best stock picks of only the best performing hedge funds and its performance has been stellar. Our picks returned 17.4% ytd, vs. 4.4% gain for the S&P 500 ETF (SPY). Our picks also outperformed the market in 2017 after returning 30.7% vs. 21.7% for SPY. Since its inception four years ago, our strategy returned 96.9% vs. 57.7% for SPY (see the details here).
You can download a copy of the previous issue of our quarterly newsletter free of charge. Now, back to Jim Roumell’s stock picks. I am going to present Roumell’s investment thesis in several stocks that are in his fund’s portfolio and then opine on whether I find the thesis compelling or not. Let’s start with the Rubicon Project, Inc. (NYSE:RUBI). Here is Roumell’s company description and investment thesis:
Company Description: Founded in 2007, Rubicon Project’s mission is to keep the internet free and open and fuel its growth by making it easy and safe to buy and sell advertising. Rubicon Project pioneered advertising automation technology to enable the world’s leading brands, content creators and application developers to trade and protect trillions of advertising requests each month and to improve the advertising experiences of consumers. RUBI’s business was built by helping publishers (ESPN.com, Hearst, Time, etc.) maximize the monetization of their online advertising inventory through programmatic trading, i.e., live bidding and selling of advertising space. The programmatic space is fragmented with RUBI estimated to have 37% market share as reported most recently by Serverbid.
Investment Thesis: RUBI’s investment thesis rests on a foundation of data points that suggests it is well-positioned as an online advertising marketplace. Secondarily, it is a company likely to be purchased for its asset value. To wit, RUBI owns its own network, possesses significant client relationships, owns a technology asset in nToggle (an A.I. software platform which could be repurposed) and, finally, it possesses a cash hoard.
RUBI is a hated stock priced with a significant margin of safety to whatever headwinds a detractor can raise. In the meantime, trends are quantifiably improving – commissions have stabilized, 4Q advertising spend was up 25% q/q and the company announced that advertising spend since February is up 10% y/y. RUBI’s market share, as reported by a third-party industry source, has moved from 30% in October of 2017 to 36% in March of 2018.
RUBI trades at 80% of book value and 90% of tangible book value. While clearly wrong in our original investment thesis, we believe we have gone a long way in correcting that mistake with significant recent purchases. A $100 million enterprise value seems very attainable – particularly if one believes, as we do, that nToggle has held its $38.5 million value – plus $100 million in year-end cash, equates to $4.75/share.
Current Market Valuation:
Shares 50mm @ $2.34/sh = $117mm
Net cash $119mm
Enterprise Value Negative $2mm
nToggle acquisition $38.5mm (we believe value is at or higher than RUBI’s purchase price)
Adjusted EV Negative $38.5mm
Revenue $100mm
Free Cash Flow Base case cash burn is $20mm; RUBI has guided to be FCF positive in 2019
Key Considerations:
– RUBI is creating a highly transparent, open market for programmatic ad impression monetization via desktop, mobile, video or audio. Many of the new players who came into the market as a result of header-bidding will not be able to compete, thus reducing the number of marketplaces back down to roughly a half dozen from the twenty-plus today.
– A look at Demand Side Platform (DSP) The Trade Desk’s valuation is instructive, despite RUBI being historically associated as a Sell Side Platform (SSP). Trade Desk supports an enterprise value of $2.5 billion. The company processes roughly $1.5 billion of ad-spend at a 20%-plus commission. RUBI processes roughly $850 million in ad-spend at half the take rate but possesses a negative enterprise value (after accounting for its nToggle acquisition). In effect, RUBI’s core business is being priced near zero.
Insider Monkey’s Take: the Rubicon Project, Inc. (NYSE:RUBI) was trading at $20 two years ago. Personally I wouldn’t touch an online advertising company that is burning $20 million cash with a 10-foot pole. Google, Facebook, Adblock and European regulations are killing advertising based businesses (our site’s advertising revenues are crashing too). Unless a credible activist gets involved with RUBI and forces its liquidation or sale, I don’t believe RUBI is worth the risk.
On the next page we will share Roumell’s other stock picks. The next stock in our list is Liquidity Services, Inc. (NASDAQ:LQDT) which lost 62.6% in the last 4 years. Here is Roumell’s investment thesis:
