Urbana Goes On A Roll

For what seemed like an eternity, shares of Urbana (URB) went absolutely nowhere. After I discussed the company in July of 2011 as a potential value investment, shares continued to drift lower for a good year and a half. As the discount grew wider, investor patience grew thin. But in the last ten months or so, the shares have been on an absolute tear; the stock is up 50% from July 2011 and up more than 100% from its 2012 low.

Urbana Management Responds

A few days ago, a group of value investors (which included the authors of sites frankvoisin.com and pettycash.wordpress.com) sent a letter to Urbana's chief executive asking that the company be more aggressive in its share buybacks. Frequent visitors to this site may recall that Urbana has been discussed here as a potential value investment due to the rather large discount at which it trades to its (mostly stock) portfolio. Management's response was rather predictable.

Urbana Corp: Management Communication

A lot of managers are unclear in communicating their stock buyback plans. They won't buy back shares, but nor will they tell shareholders that they have no intention of doing so. Shareholders are left holding the bag, wondering if management is being shareholder friendly or just pretending to be so. At the other end of the spectrum, however, are managers that are clear about their buyback intentions; these can generate extraordinary returns for shareholders. Consider Urbana Corp (URB), an investor in securities exchanges around the world.

Urbana has been previously discussed as a potential value investment on this site. At the time, its price tag seemed rather elevated. But since then, it has come down significantly. It is now at the point where once again the stock trades at a significant discount to the company's net assets, which are mostly comprised of publicly-traded exchanges such as the NYSE and CBOE.

Because of the large discount, management has bought back 10% of its shares. The company's cash position isn't large, so to effect the buyback program, management has shown a willingness to go so far as to liquidate net assets to some extent. If it weren't for certain regulatory restrictions on buybacks, it's likely that even more shares would have been repurchased.

Shareholders are not left guessing as to management's intentions going forward, either. As per the company's proxy statement:

"In regard to Urbana's share price, the environment...was...exacerbated by a few major Fund holders...becoming sellers in order to match their own fund redemptions. The resulting discount of Urbana's share price to the underlying asset value represented a significant opportunity for Urbana to profitably buy back and cancel...shares...Urbana's management anticipates continuing this program, to the extent allowed...as long as a significant discount continues to exist." (emphasis added)

Furthermore, the company's #1 goal for the coming year is to "Narrow the price/asset share discount or use it to redeem additional 'A' shares." This situation is reminiscent of the one we saw with Quest Capital, where management was very clear that as its portfolio converted to cash, it would seek to buy back shares to eliminate its discount to book value. That situation rewarded shareholders with strong returns, and hopefully this one is no different.

The stock exchanges are littered with companies with director authorizations for buybacks that go unutilized, even when said companies trade at massive discounts to liquid assets. This lack of communication does a disservice to shareholders. But when a management team is clear about its intentions and can be seen carrying through on them, shareholders can find themselves in a great position to achieve abnormal returns.

Disclosure: Author has a long position in shares of URB.A

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