Is a price correction in-store for 'worst performing' OFX?

With OFX's (formerly OzForex Group, ASX: OFX) share price down around 47% since peaking at $3.55 in November last year – following two negative bombshells – it ended up being one of the worst performing stocks on the ASX over the last quarter.

Given the nature of its currency exchange business, and quality of its balance sheet, revelations that OFX had terminated discussions with Western Union, and cut its forecast earnings for the 2016 financial year, seem out of character for a business that's enjoyed 'market darling' status in recent times.

The market is understandably peeved at revelations Western Union will not be proceeding (for now) with its takeover bid.

Given that both Western Union and OFX have successfully undercut major currency exchangers by offering much cheaper fees and better exchange rates for customers, they were seen to be natural merger partners.

Much of the recent share price rally from around $2.60 mid-November to $3.47 late November can be attributed to Western Union's non-binding offer between $3.50 and $3.70 cash per OFX share.

With the share price now trading a $2.04, it does look oversold, even when factoring in the cut to forecast earnings for the 2016 financial year from $38.5 – $40.5 million underlying earnings before interest, tax, depreciation and amortisation (EBITDA), to underlying EBITDA for FY16 of $35.0 – $37.0 million, which incidentally still represents growth versus the prior corresponding FY15 period.

OFX has attributed the cut to forecast earnings to reduced advertising expenditure associated with the OFX brand ahead of its rebranding to OFX and a new website, plus lower trading activity from both new and existing clients due to less volatility in forex markets.

It's not inconceivable that Western Union could still make a binding bid, but those who like the stock need to take that consideration off the table, and buy on fundamentals.

What clearly requires further investigation are concerns Western Union had over how accurately OFX has disclosed the costs associated with acquiring new customers.

While this is a key reason why they had cold feet about buying the business, OFX CEO Richard Kimber says they may live to regret it – equating his suitor's failure to buy his company with Yahoo missing out on buying Google in 2002.

The stock has an investment grade balance sheet, strong long-term cash flow relative to reported profit, a funding surplus of $78.4 million, a cash balance that exceeds debt; and earnings per share (EPS) and return on equity (ROE) are expected to remain excellent.

For example, EPS is expected to grow from $0.10 in 2016 to $0.16 in 2018, while ROE is expected to grow from 48.47% in 2016 to 57.72% in 2018.

Given that the stock is trading 20% below where it was prior to the Western Union's non-binding offer last November, OFX does appear to have been unduly punished, so much so that the former market darling was one of the worst performing stocks of the last quarter.

OFX's unexpected down-trending share price – which underperformed the S&P500 by 30.45% – comes after a seven month positive chart setup.

Past performance is no absolute indicator of future performance.  But given that worst performing stocks tend to outperform during the ensuing quarter – in 2014's case by 15% – those who think OFX has been oversold, may regard the current price as a very compelling entry point ahead of a pending [upward] correction in coming months.