Why CPI Card Group Stock Just Crashed

The Motley Fool · 1d ago

Key Points

  • Parallel49 Equity is selling somewhere between 2.3 million and 2.7 million shares of CPI stock.

  • The private equity firm is taking a 20% haircut on its shares, selling for just $21.50 per share.

  • Today's sell-off puts CPI stock on sale at just 4x FCF.

After enjoying a terrific month of August, in which shares soared 37.5% after "missing" on earnings but delivering on free cash flow, credit card stock CPI Card Group (NASDAQ: PMTS) is giving back nearly all its gains this morning.

As of 11:25 a.m. ET, CPI stock is down 16.3%.

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Red stock arrow trending down on a blue background.

Image source: Getty Images.

What's wrong with CPI stock today?

If you recall, CPI stock first sold off -- then took off like a rocket -- after the manufacturer of credit cards and debit cards confirmed it generated $25.9 million in positive free cash flow last quarter. This morning, someone decided to cash in on that good news, as CPI announced a big sale of insider shares on the "secondary" market.

Specifically, the company announced that "major stockholder" Parallel49 Equity is selling somewhere between 2.3 million and 2.7 million shares, depending on whether underwriters exercise their overallotment options. Worse news for shareholders, Parallel49 is selling at the rock-bottom price of $21.50 per share.

That's 20% below the price CPI stock fetched at close of trading yesterday -- which is why CPI is crashing.

Should CPI investors be scared?

To put this in context, Parallel49 Equity is a private equity firm that owned CPI Payments for the past 20 years. That's a long time for a PE investor to await a payoff. The fact that Parallel49 is taking advantage of the stock's recent surge to cash out now isn't surprising (though the scale of the discount it's willing to accept to exit its position is a bit surprising).

For investors who choose not to follow Parallel49's example, though, here's the good news: Thanks to today's sell-off, CPI stock trades today at a price-to-free cash flow ratio of just 4x. That's cheap enough to buy.

Even when everyone else seems to be selling.

Rich Smith has positions in CPI Card Group. The Motley Fool has positions in and recommends CPI Card Group. The Motley Fool has a disclosure policy.