GEO Investing

While the market was in the midst of Brexit fears, we found an information arbitrage opportunity on a technology stock that is currently 10% from its high of near $29/share.  The initial slide was due to:

  • Brexit fears
  • A series of financing transaction including a secondary offering

We view this scenario as an arbitrage opportunity where a disconnect between stock prices and available public information is noticeable, and monetarily worth pursuing. Sometimes, the mispricing of micro-caps can be substantial.

Brexit Fears Caused Unwarranted Decline in Stock Price

We think “Mr. Market” has it all wrong and that the stock should recapture its gains. In fact, originally down 17% on Brexit fears, the stock has already made back 7% of the initial loss.  You may recall an information arbitrage article we released on temporary staffing company BG Staffing Inc. (AMEX:BGSF).  A misunderstood secondary offering sent shares tumbling 17.3% to $13.53, and shares have bounced nicely to over $20.50 to produce current gains of over 50% in 5 weeks.

A closer look at the current target company reveals that although it generates about 15% of its revenue in Europe, even less is generated from the U.K. Brexit should not have a near-term negative impact on the company’s financials. Even more interesting is that since the company generates revenue in Dollars and records its expenses in Pounds for its U.K. business, margins should actually improve as the Pound currency weakens relative to the Dollar or at least offset some of the negative currency impacts from potentially lower demand for its products from the U.K market.

As for the financing transactions, a couple of benefits come to light, although management does not clearly explain them:

  • The transactions significantly improve the risk profile of the Company which could eventually lead to expansion of its valuation multiples. Specifically, as part of the transaction, the new loans are only secured by its U.K. subsidiary as opposed to the entire Company’s assets.
  • We believe part of the reason management consummated these financial transactions is to put the Company in better position to use its balance sheet to explore new growth opportunities through potential acquisitions. We were a little hesitant to buy this stock in the past because we did not see much room for outsized growth from its current businesses, although growth had actually been respectable.

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