TPS Trade Alert – December 11, 2014
December 11, 2014
Recommendation:
Buy Liquid Holdings Group (NASDAQ: LIQD) up to $1.10 per share.
Trade Rationale:
One of the most divisive subjects in investments is the benefit (or lack thereof) of hedge funds. Some investors hail hedge funds as the best thing since sliced bread. Others believe hedge funds do more harm than good.
As usual, the truth is somewhere in the middle.
On one hand, longtime successful hedge funds tend to consistently outperform the market on a risk-adjusted basis. On the other hand, there are plenty of hedge funds which fail to beat the market year in and year out, but are considerably riskier and more expensive.
What’s more, top performers or not, hedge funds aren’t accessible to the vast majority of investors. Being “qualified” to invest in hedge funds requires high net wealth or substantial yearly income. The rules preclude most people from investing in these alternative funds.
ETFs have alleviated the problem to some extent (by offering hedge fund like investments in ETF form). However, so far, most hedge fund ETFs out there are pretty watered down versions of the real thing.
So how can you invest in hedge funds without a ton of money and without the crazy risks which can be involved?
How about a company whose clients are hedge funds.
The better hedge funds perform, the better this company will do. Yet, by investing in this business, you can avoid the risks and exuberant costs associated with investing in hedge funds themselves.
Introducing Liquid Holdings Group (NASDAQ: LIQD).
LIQD provides proprietary cloud-based trading and portfolio management software to hedge funds and other investment-related clients. The company’s products integrate order and execution management with real-time risk management, reporting, accounting, and others into a single platform.
The company’s software has multiple benefits for hedge funds of different shapes and sizes. For smaller funds, it can significantly cut costs on back office expenses, such as trade reconciliation and accounting processes.
On the other hand, larger funds may be interested in the integrated real-time analytics and specialized risk controls. Of course, just about any client is going to appreciate the lower cost, streamlined solution offered by LIQD.
And that’s not all…
The trading and risk analytics software industry is massive. It’s a $28 billion market in fact. Clearly, there’s plenty of money to be had for the right products. Moreover, LIQD already has 129 clients (using 781 units) and is growing rapidly.
In addition, the company recently released its mobile-optimized investment management platform. LiquidMobile should significantly expand the potential customer pool.
LIQD is in its early phases of being a public company, so the numbers are still pretty small. However, the recurring revenue model the company employs should provide a consistent source of cash flow.
Annual contract values are about $5 million, which is over a 50% increase from the prior year. Quarterly revenues are just about $1.5 million, but that’s over 100% growth year-over-year.
More importantly, LIQD has $30 million in cash combined with zero debt. That’s plenty of operating capital, as well as the ability to make strategic acquisitions if necessary.
In fact, with all the cash the company is holding, the stock is trading at just 1.05x book value. Cash holdings make up $0.50 per share, so the market is suggesting the company is only worth about $0.40 in future earnings. That’s obviously extremely low.
Let’s buy shares of LIQD while they’re trading for rock bottom prices.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | Liquid Holdings Group |
| Ticker: | LIQD |
| Recent Price: | $0.90 |
| Market Cap: | $53.7 million |
| Avg. Daily Volume: | 516,245 shares |
Chart:
Category: TPS Trade Alert
