An offhanded comment from one of my friends this evening had me researching Emageon (EMAG). I was looking for any signs that something was going on with the company. They have had a rough go of it recently as I think small and mid sized PACS companies have had recently and will continue to have. I did uncover a couple of interesting things.

I believe that it has been heavily bought by quantitative hedge funds. What makes me think that? Have a look at the owners with more than a 5% stake. See any big names? I do, D. E. Shaw. They are one of the top quantitative trading firms on Wall Street today. Together the owners 8 firms that own more than 5% of Emageon own 67.3% of the company. I admit that I am stretching a bit since I do not know the exact trading strategies of all these firms. I do know that D. E. Shaw uses statistical arbitrage as a major trading strategy. Read about statistical arbitrage if you are not familiar with it.

What does this mean? A large percentage of the company is owned by firms whose models probably don’t understand the dynamics of the radiology marketplace. Their models show a pricing discrepancy based on historical data and the relation to other stocks. I believe then Emageon may be overvalued in the long term. I think that should the quants have another blood bath like they did in August, or if one of them has liquidity issues the stock could decline rapidly. I don’t see upside with this company from an investment standpoint.

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