It is very obvious that Urbana sells at a discount to net asset value (NAV), which the company diligently publishes every single week-- extra points to Urbana for transparency. Using that data, I have charted the Price to NAV ratio over last two years.
As of this posting, the discount is hovering close to 50%. The reasons for this may be two-fold. (1) Financials are being sold off on the wide market. Since Urbana book is mostly financials, there is a mark-to-market pressure and then the additional pressure of this organization being a financial itself. This sounds absurd, but Mr Market is known for that. In a round about way, this can be justified by the Mr Market; "If the big US banks are selling at 50% to 70% discount to tangible book, what is the point of giving any premium to this tiny Canadian financial firm called Urbana." Furthermore, (2) According to 2010 annual report, some big institutional holder had to sell off to meet redemption requirements. This forced selling has kick started a vicious circle. It is clearly visible in the growing spread, while the NAV has been fairly flat over the same period.
The upside in Urbana at current prices is significant, but it is important to look at the downside before an intelligent investor is infatuated by the upside. After researching Urbana's history and regulatory filings, I have the following risks outlined.
- Urbana paid or pays too much for a security because their universe is limited to financials, especially in the emerging world and exchanges.
- There is disincentive to hold cash for long periods of time because of the management fee structure.
- Management is not fully aligned to the shareholders (they make more income, the bigger the portfolio)-- see blog article by Saj Karsan.
- Management doesn't prove to be an effective capital allocator in the long run.
Disclosure: I am an owner of Urbana Corp at the time of this writing
