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Hi Fellow Fools,

Here is my rebuttal to the ongoing recent short attack, as well as one directed against ISRG:

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I enjoyed your article. Your article actually prompted me to think about how companies can combat such an onslaught of inuendo and unproven attacks. Certainly, I believe shorts have a much needed place in our markets. I most certainly enjoy reading a different take on a company than the herd. After all, wasn't Chanos correct about HP. Weren't others correct about housing. Certainly those who ran up the red flag on Kodak, Best Buy etc... did investors a service by trying. However baseless and for profit over attacks are nefarious and evil. So how does a company fight these types? I am very interested on your take of EBIX and a solution. I posted one that I think would be luncay but is certainly good for banter. I hope to hear your thoughts or other bloggers/article writers at the Fool.
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Since I first promised to dig more deeply into this EBIX folderol, I’ve spent way too many hours considering how to summarize a pro or con case. The smoke has cleared and here is what I personally think, and why. It’s turning out to be easier than I’d originally imagined.

Just some housekeeping to start: I am deeply skeptical of most analysts, particularly those on the buy-side. This is due to suspicions of confirmation bias. It can therefore be said that I personally have a negativity bias, which is certainly true and that bias is very strong. You may sense from my recent writings that every security is a minefield and intrinsically valueless. I will finish this piece with some relevant reasoning why that is so.

Onward, then…

It is usually very difficult to look back and reconstruct what was happening at a particular time, however the Copperfield Research (heretofore annotated as CR) short attack and the Crystal Equity (CE) and Craig Hallum (CH) rebuttals offer a clear starting point for evaluation; evaluation of claims against EBIX by the short seller and evaluation of the conclusions that Crystal and Craig Hallum come to (and the predictive capabilities of Copperfield and Craig Hallum...a true and valid back-test).

When conflating the 3 reports, there are very few salient issues. All can be tested with some degree of confidence. These are:
1. Quality of the individual reports
a. Copperfield- evidence suggests that this is indeed a hatchet job. I want to believe it is not, but evidence suggests otherwise.
b. Crystal- this is the most neutral of the reports; clear-eyed, non-predictive, just the facts.
c. Craig Hallum- confirmation bias biases me against this report, but they make specific predictions such as “$2 in earnings is realistic.” Throughout the report, most of the statements they make are demonstrably true. Earnings did not quite make it to $2, but I’ll grant them success via the close-enough rule. Alas, their $35 share price target is wrong.

2. Accounting shenanigans: simply no evidence to back the short attacks.

3. Quality of free cash flow: evidence suggests auditors are on their game. Conclusion therefore is that we should take the company at their word. There is no real evidence of manipulation.

4. Tax “evasion”: nope. What EBIX is doing is regrettably common, not illegal. Does this make their true earnings lower? Sorry, no.

5. Success of acquisition integration: this will be an ongoing story and always a risk factor. No particular evidence that EBIX is doing it badly now or in the recent past.

6. Quality of management, and Robin Raina in particular: If one digs deeply and imagines broadly as I tend to do, my bias suggests that Raina is an ego-maniac (he’s been caught in an extremely minor political scandal); he wants his foundation to support his egoism while doing some good in his home country; he’s overpaid (as most CEOs are); and while most CEOs probably have some megalomania innate, that megalomania must never be ignored (see McClendon, Aubrey). So…meh…business as usual.

This brings us back to the realities of the situation and I’ll start with this from the CH report:
Tuesday morning an anonymous posting hit Seeking Alpha. Then, yesterday at 1.45pm when cumulative volume for the day was ~550k shares, a wave of extremely aggressive selling hit the shares, driving them down 24% by the close, on over 14.5 million shares in total volume. This is truly extraordinary, given our math which concludes that between insiders and a handful of key holders who we believe were not part of the selling, there does not appear to be enough stock left in the float to drive the kind of volume seen yesterday. By all accounts, it appears to have been a concerted effort on the part of some players, to drive the shares lower and capitalize on short positions which were increasingly becoming a liability for their owners. The action is not without precedent.

How is this possible? The stock market is a game. We tend to think that we earned a dollar, sent that dollar to our broker and converted that dollar into a dollar’s worth of company equity. Nice story, but untrue. Money is fungible, stock value is fungible and therefore we have fungibility squared. This is why I personally look for reasons why not to buy a particular stock…which is the point of this exercise. I conclude that EBIX stock is undervalued and has been manipulated mercilessly. Welcome to the stock market. I also conclude that this is a risky time to buy EBIX, even though it is “worth” more than 16 clams. See the Crystal Research conclusion for confirmation of my bias.

To AaronRogers: how can EBIX fight baseless claims?
EBIX can pay a dividend and buy back shares with free cash flow. To EBIX and Robin Raina, I concede; you win. But I’m expecting to buy back in in the $13s, maybe sometime in March.

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I appricate your well thoughtout post. Thank you for sharing your ideas and conclusions. I too feel that EBIX has been manipulated. However, I plan to hold my position(300 shares)which where purchased at $17.12 per share on 11/7/11.

As an investor, as opposed to being a trader, I intend to hold for at least 3-5 years. But I will not hold blindly if circumstances change.

Once again great your due diligence has proven very insightful.

Respectfully, Mike
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For the record, Mike, had I bought in at $17.12 I'd probably hold on, too, especially with what I think I've learned. What we are all after is the stock that will double in two years (otherwise, just buy mutual funds). Is EBIX likely to reach $34? If all things stay the same, the odds are very good.

I continue to watch. If some catalyst appears that moves the stock higher, I'll buy in sooner. I'm willing to pay more than $17.12...I just don't think I'll have to at this point. The thing for the newbies who might be holding, as well as looking over our collective shoulders: don't be surprised if EBIX goes to $13...or $11. If it does, do not sell! BUY!

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Thanks Randy, interesting read. Solid confirmation bias, thought through in greater detail than I had employed myself. To your follow up post, just wanted to point out to less experienced investors that it's not common expectation to double a stock price in two years, even in Fooldom. Doubling in 5 years is an approximate 15% annualized return that beats the pants off the S&P 500 and certainly any mutual fund over the long term. Sure we all like when one doubles in a year or two, but that's certainly not a normal average expectation required to outperform mutual funds.

I'm assuming the comment was a brain fart;) If not, I'd be delighted to give you half my annual investment gains for all eternity in exchange for guidance to those kinds of results.

Thanks again,
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Actually, Duke, doubling in two is exactly what I'm after. It's aspirational and unrealistic to expect (to be right all of the time), but there has to be a lot of space between what we try to do with individual stocks and what we are expecting with mutual funds.

The measure of success for me is whether I outperform NASDAQ, young and growing companies (which are typically volitile).

My personal success has improved, and I attribute it to the things previously mentioned: The Motley Fool, these boards and a lot of back and forth with my broker/brother primaily. That said, for the newbies looking over our shoulders, don't think for a minute that I think I have it figured out; only 20% of my retirement money is in individual stocks (in our Roth IRAs). Even the fool will tell you that if you are going to mess in individual stocks, keep some core Google-type holdings.

I have to say, that if EBIX continues to do what EBIX has been doing and that they are as real as we think, doubling in two years is quite realistic (it can double simply on P/E expansion to 20). This is the type of stock we want to be betting on and I want to personally thank the Fool for bringing it to my attention.

All the best out there!

(still waiting for somebody to sell me their EBIX shares for $16.25)
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