A $350,000 house for a nickel down — FORTY does it again

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

For reasons that I discussed in details in a recent posting (hint: terrorists do read Internet postings — intrigued? Find the posting here,) a posting that I wrote back in February 16th, 2013 (here,) about the insanity surrounding the pricing of FORTY, the equity of Formula Systems, a holding company with majority interests in three other publicly traded companies, an incredibly strong balance sheet, revenues and net income raising like a rocket, and near-zero liquidity, has become one of the most read postings on this blog.

In the February 16th posting, I pointed out how the liquidity crunch surrounding FORTY had caused the capitalization of Formula Systems to decline $6.3 million (the equivalent of 25 model year 2012 Rolls Royce Ghosts) when 1,000 shares were traded, representing a value of $18,500 (the equivalent of one model year 2012 Kia Sportage.)

In a later posting, on May 17th, 2013 (here,) I followed up on this pricing oddity, introducing a leverage factor to describe the insanity. This leverage factor, the Low Liquidity Market Capitalization Leverage (or LoLiMaCaLe for short,) provided for a 340.5:1 leverage on the February 16th, 2013 trading.

This fantastic leverage, however, was crushed when, on May 17th, 2013, four shares were traded:

Today, for instance, four shares were traded (no, this is not a misprint…. four shares were traded,) at $21.68, up from $21.03 at the open. With a spread of $0.65, this transaction, valued at $86.72 had a positive economic impact of $8.96 million.

In our first, crude purchase model, this could be expressed as a situation where the economic equivalent of a pair of Pacer Heart Throb roller skates (at $79 plus tax) is able to create economic value equivalent to 36 model year 2012 Rolls Royce Ghosts.

In terms of our leverage, this transaction creates a leverage, LoLiMaCaLe0.1/9.0 of 90,000:1 (note that we round up… had we not, the leverage would have been 103,422:1.) If you applied LoLiMaCaLe0.1/9.0 to your $100,000 real-estate purse, you would have leveraged yourself up to $9 billion, handily enabling you to outbid Larry Ellison in the pursuit of the Lanai island, reportedly going for a measly $500 million.

Or you could just go ahead and put your hands on a good chunk of Manhattan.

Yesterday, on December 12th, 2013, LoLiMaCaLe came to my mind when the days trading of precisely two shares (yes, that is two — 2 — shares,) caused a market price drop of $0.02 per share, corresponding to 0.08% of the equity price at open.

Two shares and $0.02 does not sound like much of anything, but that is precisely where LoLiMaCaLe comes in handy. The straight economic value of the trade ($0.04) in relation to the destroyed capitalization (approximately $280 thousand,) leads to a LoLiMaCaLe of 7 million (LoLiMaCaLe0.0004/0.280 = 7,000,000:1.)

USS_Nimitz_in_Victoria_Canada_036This leverage is astonishing. If applied it to the buying of a house, for instance, one could buy a $350,000 dwelling for precisely five cents down, and if you felt inclined to put up $500 of your own money, you could leverage up to $3.5 billion, which would almost enable you to buy the new One World Trade Center in Manhattan, which, at a cost of about $3.9 billion, or $1,495 per square foot is perhaps the most expensive single building in the world.

Alternatively, you could, of course, put up an additional $143, leveraging up to $4.5 billion, and buy a Nimitz class carrier.

But it doesn’t end here. Historically, there has been a strong disconnect between the equity price of FORTY and the sum of the equity holding of its three subsidiaries (Matrix IT Ltd (traded on TASE as MTRX,) Magic Software Enterprises Ltd. (traded on Nasdaq and TASE as MGIC,) and Sapiens International Corp. NV (traded on NASDAQ and TASE as SPNS)) with, for instance, FORTY trading at a 22% discount to its subsidiary market capitalization on June 20th, 2013 (something I wrote about here):

(c) Per Jacobsen, 2013. All rights reserved

(c) Per Jacobsen, 2013. All rights reserved

Over the summer period, the capitalization gap closed, with FORTY literally sprinting in price and achieving an entirely predictable appreciation given that Formula Systems is simply and only a lean holding company with a skeleton staff and no notable operational expenses.) Recently, however, the gap has widened again, with the per share price of MGIC, SPNS, and MTRX pulling strongly forward and, surprisingly, the per share price of FORTY quite recently falling back on near zero volume.

Yesterday FORTY’s stake in its subsidiaries reached a total capitalization of $447.6 million, while FORTY’s capitalization was $319.8 million, for a gap of an amazing $127.8 million or 40%.

That’s 40% on a company with practically zero debt, amazing cash flow, and operational growth that would make Warren Buffett drool. Quite possible the largest holding company discount that I have ever seen. It would appear that it is time to tighten the seat-belts and prepare for another blast-off.

Participate, please….

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