Thursday, February 10, 2011

Urbana: I Snooze, I Lose

Yesterday, I was all set to buy shares of Urbana Corporation. Unfortunately for me, the stock rose some 40%, and I was too late getting in there. It would have been an incredible rate of return had I just been ready to buy it one day earlier; but instead it turned out to be a missed opportunity. Here's the post about Urbana that I had ready to go; alas, it is now out of date because of the one day change in the stock price:

Stock exchanges like the NYSE and NASDAQ have moats that help them earn above-average returns in normal years. During trading hours, they offer investors, institutional and individual alike, an unparalleled environment by which trades may be executed. As such, stock ownership of these exchanges comes at a premium price, unless that ownership is made through shares of Urbana Corporation (URB).

Urbana Corporation owns $160 million worth of securities, almost all of which relate to the ownership of various exchanges around the world. For example, Urbana's top three holdings are NYSE Euronext, Chicago Board Options Exchange, and Bombay Stock Exchange, which respectively comprise 36%, 25% and 16% of Urbana's portfolio.

So far, there is no reason for investors to get excited. After all, every investor could purchase shares in public exchanges himself. But what should get value investors excited is the fact that Urbana only trades for $100 million! This means investors are getting a 38% discount on this basket purchase of a few exchanges.

Due to the large discount to net asset value, the company has begun buying back shares. In the last six months, it has repurchased and cancelled about 5% of its shares, and authorization remains in place for continued buybacks of a similar amount over the next six months. Due to the large discount to net assets at which Urbana trades, this has served to increase the net asset value of each share.

But a large discount doesn't necessarily mean investors will make money. The exchanges Urbana owns could drop in price. Competition is growing for alternative trading platforms, which could erode the moat of some of the mainstream exchanges. Not only are after-hours exchanges gaining in importance, but so is the trading of unconventional investment vehicles on niche platforms.

But the good news is that even if you believe there is a chance that the major exchanges are on the decline, you can still make money off Urbana by hedging your bet. Almost 70% of Urbana's portfolio consists of publicly traded securities, allowing investors the opportunity to neutralize their portfolio effects by shorting the ones they believe trade at premiums to intrinsic value. As for the remaining 30% of Urbana's portfolio, which consists of privately-held shares, those are thrown in for free at Urbana's current price anyway!

It is also worth noting that shares of Urbana that are available to the public (Class A shares) have no voting power. So if management stinks it up and shares lose value, investors as a group won't be able to oust management; Instead, all they can do is sell their shares in the hope that somebody else will take them.

Nevertheless, Urbana offers investors assets at a large discount to their publicly traded values. As such, this appears to be a situation where upside potential trumps downside risk. Investors concerned with the viability of certain public exchanges are even offered the opportunity to hedge those specific returns out of their investment in Urbana, which reduces risk even further.

Thanks to Trevor Scott for the find!

Disclosure: No Position


Anonymous said...

what are your views on MPAD.OB

Saj Karsan said...

Hi Anon,

It does look cheap at first glance. Any idea why they have needed such a large cash balance for so long?

Anonymous said...

You are in luck. URB closed today @1.46

Ross said...

Another nail in the coffin of the efficient markets hypothesis

Anonymous said...

Hey Saj,

Just wondering, what causes the discrepancy between URB and URB.A (only a matter of votes?)? If you were to invest which class would you chose bascially?

Saj Karsan said...

Hi Anon,

Yeah the difference between the shares is rather large! I don't know why that would be when the difference is only votes. I wouldn't be buying a massive position that could have any sway whatsoever, so I would just want the cheaper one personally.

Anonymous said...

getting cheap again....