This Anti-Uber Trade Could Net 400%

Posted On January 6, 2015 2:00 am

Car sharing companies were one the hot stories of 2014. This anti-Uber taxi based stock might be ready for its price surge.

The use of dynamic or “surge” pricing to align supply and demand is one of the key innovations of the Uber business model.   For the second row Uber customers were shocked, simply shocked, by the surge in prices on New Year’s Eve with people posting screen shots showing rides as short as 4 miles costing upwards off $150 as prices surged by 9x the normal fare as .

The price of a cab ride is not the only thing that surged. In 2014 Uber, which is still privately, saw its valuation more than quadruple to a whopping $40 billion. The demand stems from the fact that Uber represents one of the few true ways to play the next evolution of mobile internet based businesses; one that is scalable on a global platform and attacks an entrenched but fragmented industry. The fact that it, along with its peers such as Lyft, are privately held means only the deep pocketed and well connected Venture Capital firms have been able to invest. This has left individuals scrambling for ‘derivative’ or ‘collateral’ ways to play the Uber phenomenon.

Shorts Took TAXI for a Ride

One of the ways has been to sell short shares of Medallion Financial (TAXI) whose shares declined some 40% in 2014. At this point near $10 a share I think the stock offers a good buying opportunity.

TAXI Chart 010515

So why have people been picking on TAXI? Its business specializes in originating and servicing loans that finance taxicab medallions. The theory being that Uber and Lyft are going to disrupt the traditional taxi industry and the need for medallion financing right out of business.

Shorting TAXI became the go to move when a handful of high profile articles, including this in the New York Times highlighted the decline in medallion prices, which has crosses above the $1million level in some markets such as New York, and the risk to TAXI’s business model.

In September the short interest TAXI jumped to a whopping 23% of the float. That number has since dropped to a much more reasonable 5% of the float suggesting most of the speculative selling is over. Indeed, the stock may now be poised for rebound.

While there will certainly be changes and likely pressure to pricing I think traditional taxi industry will still exist for years to come. And so will Medallion Financial’s business.

Value Proposition

Medallion’s management are smart operators and have not been blind to the larger trend of shifts in the taxi industry. They originally formed the company in 1995 to take advantage of the limited supply and strong demand for taxi medallions that caused prices to surge by as much as 500% over the next decade in some markets. There’s that supply/demand “surge pricing theme again.

They have been diversifying their loan portfolio accordingly. It expects in 2015 for medallions to represent about 60% of its portfolio down from nearly 95% two years ago even as overall lending and revenues grow by 15% to $50 million.

Taking up the slack is increased lending for general consumer autos. Home improvement loans and mezzanine financing for small business. These are areas that traditionally banks are still reluctant to lend but has seen growing demand as the economy improves. Such loans will deliver healthy profit margins.

While micro cap companies bring certain risks such as low trading volume and competitive threats from larger firms the downside in TAXI appears very limited. It currently has over $2.50 a share in cash and trades at a discount to its book value which is currently placed at $11.30 a share.

The Trade:

I want to use options to further reduce our risk. I’m going to use an at-the-money call with five months remaining until expiration. Specifically;

Buy to open May $10 calls for $1.00 a contract.

This limits our risk to the $1 cost of the call option.   I have a price target of $15 a share which would mean the calls would be worth $5 or a 400% gain.

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.