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Smooth Momentum And Valuation Suggest High Returns For Liberated Syndication
Feb.12.18 | About: Liberated Syndication (LSYN)
Ruerd Heeg
Ruerd Heeg
Long/short equity, Deep Value, special situations, book author
Marketplace
Global Deep Value Stocks
(1,635 followers)
Summary
A combination of momentum and multiple value factors is one of the best strategies among the 300 strategies described in What Works on Wall Street.
Every month I quantitatively rank stocks according to a similar strategy, with various improvements.
This month's list tells us Liberated Syndication is a good pick on a statistical basis. I describe the company below.
This idea was discussed in more depth with members of my private investing community, Global Deep Value Stocks.
In What Works on Wall Street, James O'Shaughnessy describes about 300 quantitative stock investing strategies. He investigates their long-term returns and risks. Last year I discovered it is possible (but not easy) to implement many of these quantitative strategies. So these advanced strategies are not just an edge for hedge funds anymore, but anyone can implement them at home. It can be done by screening for stocks using very flexible criteria. Then export fundamentals and price data for each stock and then rank them on multiple criteria. Finally, compute the combined ranks.
One of the best strategies described in What Works on Wall Street is a mix between value and momentum called Trending Value. He ranks US stocks with positive momentum on various value factors and then proceeds with the 10% with the best rankings. These best 10% he ranks on momentum. The 25-50 stocks with the best momentum enjoy high returns (21%) despite low risks (Sharpe ratio 0.9).
I have done something similar, but with various improvements. One of the biggest differences is that I rank on smooth momentum instead of on raw momentum. Smooth momentum suggests many knowledgeable investors are slowly buying into the stock. Therefore smooth momentum serves as better evidence for "wisdom of the crowds" than bumpy momentum caused by a few events. For more details including links to scientific papers see my freely accessible article on statistical investing.
For international stocks, I share the details of the best-ranked stocks with my Marketplace subscribers. For the much more expensive US-listed stocks I share results here on the free part of Seeking Alpha.
Liberated Syndication
Liberated Syndication (OTCQB:LSYN) has the best ranking in this month's list. This stock is relatively cheap based on the ratios retained earnings from recent years/market cap and market cap/free cash flow. The stock is also a good statistical pick because of its low liquidity. That is, the ratio 3-months average volume/Public float is relatively low.
Ignoring recent momentum which is subject to mean reversion the 1-year momentum is also good and reasonably smooth:
That Liberated Syndication is a good long on a statistical basis does not mean many people will be eager to buy it, as my analysis below will show.
Liberated Syndication hosts podcasts. It earns most money from hosting subscriptions but also from advertising revenue sharing and from commissions on subscriptions to premium content. See page 12 of the recent quarterly report.
Right now podcasts have a low market share among various other audio media. I think, however, this tiny market share is growing, although slowly. In any case: profits and revenues have gone up much at Liberated Syndication in recent years.
Liberated Syndication has an ugly history and maybe even uglier recent events. The company is a spin-off of FAB Universal Corp. (OTC:FABU). FAB Universal Corp.'s main operations were kiosks in Beijing. However, the American parent company, run by Americans, also owned the podcast business. The PRC business was operated as a variable interest entity. Then, in 2014, a reputable short-seller claimed many of these kiosks simply did not exist. The allegations were followed by delisting and subsequently, the stock went to zero.
FAB Universal Corp did its best to investigate the irregularities with the PRC business. However, these efforts were fruitless. I guess the legal owner of the kiosks just walked away from the VIE-contracts.
The podcast hosting business was spun off as Liberated Syndication to shareholders of FAB Universal Corp in 2016. Noteworthy is that the management of Liberated Syndication is still the same group as the management of FAB Universal Corp. Though legally Liberated Syndication is a spin-off the transaction can better be described as a name change. That the same management is still in place is a risk. Did they have anything to do with the irregularities in the PRC? We will probably never know.
The new name might also be a joke, like the ticker symbols SYNC and SIXD a couple of years ago. Who is liberated? Management? Or the shareholders of FAB Universal Corp?
Recent events do not remove my skepticism about the management of Liberated Syndication. In December 2017 the company announced huge grants of 3.6 million stocks in total. These grants will vest on satisfying conditions related to the market cap and the share price. Another condition is that the company will list on the NASDAQ within 24 months. See here and here.
I do not think such grants are good incentives for management. Management should be rewarded based on other criteria that are director related to the business. For instance, criteria based on revenue, operating profit and free and operating cash flow.
Instead the grants they recently got look like a big pumper's premium. They might still succeed, however. They might have a good plan to pump the stock... err ... develop the business. I have seen it before!
Part of this plan might be a fairly big acquisition. Recently the company acquired a hosting company called pair Networks. Kevin Martin is the seller, founder and CEO of pair Networks. The deal suggests confidence in the combined company.
The total consideration was $16.06 million, but $4.19 million is used to pay off pair Networks' net debt. From the remaining $11.87 million Kevin Martin gets $2.5 million in shares: 1.58 million new shares. He gets the remaining $9.37 million in cash, but not from the company. Instead the company finances the deal by borrowing $10 million from a bank. According to the loan agreement the interest rate is low, again confirming confidence in the company. See also the press release.
It does not seem the deal has to be approved in a shareholder meeting, despite the fact this is a really large transaction.
The company did not provide many details about what it bought: no reliable numbers for revenue, profits or book value. All we got is the following sentence in the press release: The combined businesses represented approximately $23 million in annual revenue and approximately $7 million in EBITDA for 2017. Unfortunately, the numbers for the last quarter are not yet available. Therefore based on the first 3 quarters of 2017 my best guess is pair Networks had $13 million of revenue and $5 million of EBITDA. To me, these numbers suggest the purchase was not very expensive.
Conclusion
Liberated Syndication is a stock with good momentum and various other characteristics suggesting high returns, on a statistical basis. Corporate governance does not seem to be great, however. I do not like the incentives management has to pump the stock. That said, often pumpers are successful.
In particular, the recent acquisition of pair Networks could increase the value of the company. It does not seem to be an expensive acquisition. Also, the transaction shows confidence in the company. Therefore, the combined company may be worth more than the 2 parts. I would not be surprised if overhead costs can be saved and if the 2 parts can cross-sell products to each other's customers.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I do not own this stock since I also implement the same strategy internationally. International stocks found with this strategy are much cheaper (on a statistical basis) and therefore more attractive to me.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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