Long / Short Trade Idea - Urbana Corporation

Recently I have been working diligently on a few new investment ideas, and I will be posting them on here for everyone to see. My ideas are eclectic and run the gamut from long, to short, to merger-arb, to spin-offs, etc. The basic theme amongst them is that I perceive there to be a high probability of a large, low-risk profit. In addition, I typically perceive there to be a catalyst that will crystallize profit in the near future.

The first investment thesis is on Urbana Corporation, and it is a long / short trade idea. I have fleshed out the thesis into a PowerPoint presentation with audio dubbed over it. If you are interested in seeing it, you can download the presentation here:

http://www.mediafire.com/?wmdl2maizpvb22z

The basic investment thesis is shown below. Please note that this was written during the first week of August, so the numbers may be slightly different at the time of this post, however, the basic thesis remains intact.

• Urbana invests in the exchange sector and holds both public and private exchanges.

• It is trading at a 35% discount to its NAV, which is calculated every week. The NAV is about $1.94 (will fluctuate with market prices and FX rates) and the stock is at $1.24.

• You can hedge 70% of the NAV by shorting the NYSE, the CBOE, and the TMX Group in terms of their percentage make-up of the NAV.

• Running basic stats on the NAV and the stock price shows that the NAV has a standard deviation of 45% whereas the stock has a standard deviation of 100%, indicating that the stock is alot more volatile and therefore is more likely to reach NAV. In fact, in the past two years, it has traded between a 40% discount and a 0% discount essentially twice. As such, at a 35% discount, I view this as being a 7:1 upside / downside ratio in terms of there being 35% upside and 5% downside.

• There are several catalysts: 1) Management has been active on its buyback, taking in 2% of the stock in June and July alone. 2) The Bombay Stock Exchange, which represents 15% of NAV, is set to go public in 2011. It should unlock value and will allow an investor to hedge a full 85% of NAV. 3) Portfolio company revaluations. George Soros just took a 4% stake in the BSE for $40mm. Applying that price to Urbana's stake in the BSE increases the value from $23mm to $26mm, and adds a few pennies per share in NAV value. 4) Tom Caldwell, the CEO, is adamant that the CBOE will not be a public entity in the near future, either via a Takeover Bid or a merger. The CBOE makes up 30% of NAV, and a transaction would obviously create a lot of value for Urbana shareholders.

• Comps, such as closed-end funds don't trade at such a high discount typically, and right at this moment.

If there are questions or comments, please feel free to post. Constructive criticism is always welcome.