Time to Double Down on Inuvo/Vertro
In October, we named Inuvo as our new focus stock and we encouraged investors to buy the stock (it was trading at $1.05 at the time) based on a number of factors (that can be reviewed here). Subsequent to that report, a merger was announced between Inuvo and Vertro, which happened to be our other focus stock. The terms of the merger (exchange of each Vertro share for 1.546 shares of Inuvo) have resulted in the two stocks being essentially linked, with Vertro shares mirroring any move in Inuvo’s stock. This is not suprising and is exactly what would be expected in a merger that is structured this way.
We fully expected that year end tax loss selling could drive Inuvo (and thus Vertro) lower, given that it was trading near 52 week lows and most holders who had bought over the last year or so were holding at a loss. However, we have been surprised at how low the Inuvo shares were pushed by the year end selling. With no catalysts this first week of the New Year, the trading in the shares has been almost non-existent and the stock closed yesterday only slightly above the new 52 week low of 67 cents that was set during the trading session. We believe that the selling in Inuvo and Vertro shares has been way overdone and that the stocks are trading well below their intrinsic value. At yesterday’s closing price of 68 cents per share, the post close cash adjusted market cap of the combined companies is slightly below $10 million (+/- 20 million post close shares x 68 cents minus $4 million Vertro cash). We believe this will prove to be a short term aberration, that investors who bought on our original recommendation should “double down” at today’s prices and consider committing even more capital.
The cash adjusted sub $10m market cap for the combined Inuvo/Vertro does not come close to reflecting the potential value that can be created for shareholders when this merger is complete. Vertro and Inuvo each traded at market caps substantially higher than this as stand alone companies and Inuvo by itself had a market cap of over $17 million prior to the merger announcement. Given the strengths of each company, the much improved balance sheet of Inuvo following the deal, the improved access to growth capital, the significant ($2m +) cost reductions for redundancies, the reduction in revenue concentration risk and most importantly the very significant operating synergies that will result from this combination; we believe the combined Inuvo/Vertro will prove to be substantially more valuable to shareholders than either had been or could be as a stand alone company. As such, we fully expect investors who buy at today’s prices to more than double their money over the next 6 months and potentially enjoy much greater returns 12 – 18 months out.
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