IFON – InfoSonics NCAV stock BUY – Small Investor Portfolio
Posted on | April 9, 2010 | 9 Comments
Last week, on 4/1/10 I purchased 650 shares of IFON – Infosonics at $ .7719/share for the Chroma Investing Small Investor Portfolio. This was a total investment of $506.74 including the $5.00 ChoiceTrade commission. The price dropped into the low .60′s until today where has recovered to .72/share. I bought the shares because IFON is a NCAV stock which is likely to be the focus of the Small Investor Portfolio.
Here is what IFON says about themselves from their latest 10k
“We are one of the premier distributors and providers of wireless handsets and accessories in Central and South America. We provide end-to-end handset and wireless terminal solutions for carriers in those markets. We distribute products of original equipment manufacturers (OEMs), including Samsung and others. We are also involved in the designing, sourcing and distributing of a proprietary line of products under our own verykool® brand, which includes entry-level, mid-tier and high-end products.”
What that statement doesn’t say is that Infosonic, halted distribution in the United States and Mexico and that now it derives approximately 87% of their revenue from Argentina. That seems like a good segue to what could scare you away from making this investment.
So what are some of the risks of an investment in IFON? These are not all the risks. You may in your own risk assessment discover some that are more important to you. These are ones that I think are important to note.
1. A 30% tariff in Argentina targeting imported headsets could decimate IFON’s business there. Or as IFON says, “…we expect it will reduce significantly the overall OEM sales volume in Argentina. We believe that this tariff will have a material adverse effect on our sales, results of operations and prospects for our OEM products in Argentina. ” Given the proportion of overall business, this could have catastrophic results for Infosonics. In fact the tariff has already begun to effect its business. “Our three largest customers in 2009, all carriers in South America, represented 28%, 28% and 18% of our net sales in fiscal 2009. In 2010, a customer accounting for 28%, has begun significantly reducing its purchases from us as a result of the newly enacted Argentina tariff on wireless handsets, among other electronic devices. ” This will certainly effect Infosonic’s margins. It does seem that much of this fear is baked into the current price of the stock given the drop from over $1.00 just a little more than two weeks ago. If you are interested, you may want to wait and see if the stock dips back into the low .60′s again before buying in.
2. This almost goes without saying, but the wireless communication business is a brutally competitive industry and IFON is a no-moat business. For some investor’s this is enough to scare you away. But most cigar butt type, Net Net stocks, are no, or thin moat companies.
3. IFON had a net loss in 2009 of $1.5 million. Ordinarily, this would get the company tossed to watchlist only pile, but since InfoSonics had positive income from continuing operations, I made an exception. This is probably also the other reason the stock price got flushed almost 40% in less than three weeks.
4. Stock Price Volatility. From their 10k, “the closing price of our common stock has fluctuated between $2.51 and $0.10 from January 1, 2009 through March 19, 2010, and we anticipate significant volatility in such price to continue for the foreseeable future.” This is not actually a risk to me. I expect and hope to capitalize on it. So, I obviously bought shares too early, but I bought on a day that in which the price dropped 20%. As the saying goes, it is hard to time the bottom of a market.
5. Margin pressure. I touched on this briefly in Risk #1, but IFON’s margin pressure is not limited to the Argentine tariff issues. As Infosonics says of its own performance, “… in 2008, although we had higher sales, we were not profitable due to lower gross margins, as well as, among other things, higher operating expenses.” In such a competitive industry, margin pressure is not a risk, it is a certainty. But that does not mean they will succumb.
6. Potential De-listing from NASDAQ. Obviously, the price of IFON is currently trading below the required $1.00/share price. If this persists then IFON could be delisted, which will almost certainly result in a drop in the share price, at least in the short run. Again, I don’t necessarily view this as a long term risk, since this would actually provide an opportunity to buy additional shares at an even better discount.
So after all these risks, why would anyone in their right mind buy this stock? Let’s turn next to the case for investment.
1. IFON is a NCAV stock. Their current assets are $66 million with total liabilities of $41.6 million. This means they have $24.4 of Net Current Asset Value. Divide that by the 14.577 million shares and you get a per share value of $1.67. Because I use the old school, as in Ben Graham depression era, margin of safety of 33%, that reduces my buy in price to anything under $1.10. Or if you like to use another, more conservative version of Net Net Valuation that I learned from Jae Jun at OldSchoolValue, you still have a buy price of approximately $.79/share. We could also assume that the company will lose another $1.5 million for 2010, but, even this would only reduce the buy price to $1.03/share from $1.10/share. There is a margin of safety on the margin of safety.
2. The Altman Z- non manufacturing score is over 2.6, which suggests that the likelihood of bankruptcy in the next two years is very unlikely. So while the company is certain to face some turbulence, I don’t think, in my suggested holding period of two years, that the stock price will go to zero.
3. The CEO has a large stake in the company. As of the latest 10k, Joseph Ram, the CEO, owned 30% of the outstanding shares. While this is no guarantee of his interests aligning with shareholders, it often is. I like to see large ownership stakes by management.
4. Continuing operations were positive. While IFON had a net loss the company was slightly profitable in continuing operations. This is a reverse from the past few years. I don’t put a lot of faith in this.
5. The company has recently completed a stock buy back program. While the amount $500,000 was not huge, the average purchase price of $.63/share (below its current share price) shows that management understand when it is a good time to buy its own shares. Often share buy backs are extremely negative to me. When the buyback is done at peak share price, the shareholders value is depleted. This buy back was positive for shareholders.
Investing Strategy
I don’t believe in making up a story of how IFON’s share price will rise. Stories often get in the way of proper valuation of a company. There is not any immediate catalyst to drive the price up. But my overall strategy is borrowed from Ben Graham: Hold until it appreciates to fair value or 50% or 2 years, whichever happens first. In other words, if this stock has not appreciated within two years I will sell it. If it appreciates to fair value, I will sell it. The only other factor that may effect this is if I need to sell this stock because another better deal comes along.
Disclosures: I own 650 shares of IFON as mentioned earlier. If the price drops further I intend to purchase more shares, I may or may not post about this additional purchase, if it should happen. Remember only a fool would invest based on someone else’s advice without checking it out first. Please verify all information for yourself and do your own analysis before investing in any security.
Tags: Net Net stock > Small TIme Investor
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9 Responses to “IFON – InfoSonics NCAV stock BUY – Small Investor Portfolio”
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April 12th, 2010 @ 11:44 am
I have emailed the IR site at Samsumg. My take is that Samsung is producing or will be producing cell phones in the tax free zone in Argentina. It is very difficult to get a 100% read and Samsung has not responded to my email.
I would think that IFON will not be affected by the 30%(really only 10%) tax as cell phone purchases from Samsung will be exempt of taxes.Samsung is not the only firm producing cell phone in T.D.F Arentina.
You may well be served to also look closely into this senario.
Charlie Star
April 14th, 2010 @ 4:58 pm
Investor’s don’t like uncertainty, that has helped beat down the price. Wish I could have picked up more shares in the low .60′s. None of my orders got filled.
April 15th, 2010 @ 3:55 am
You are certainly in good statistical company with a NCAV stock.
My main concern with IFON is that they have 50 cents per share in net debt.
It is much harder for me to feel confident of a margin of safety on a leveraged company, especially if I’m buying it based on its assets.
What do you think about SPCO? This is a NCAV that I own a few shares in. Of course, it has its own problems (declining industry, pink sheets, illiquid, etc), but you might find it interesting.
April 15th, 2010 @ 11:17 am
Parker,
As always I respect your caution on IFON. Given that the stock price dropped 20% right after I bought it, the market place may have agreed with you. The acid test ratio for IFON was 1.5, which is what I looked at to guard against the company having a liquidity risk. I respect that this and every investment I make is not right for everyone else. Just as every investment Buffett makes is not right for me. Although I wouldn’t mind his track record.
I have not heard of SPCO, it did not come up on any of the screeners I use. I will check it out and post later, once I get caught up on the investments I have made for the chroma portfolios.
April 15th, 2010 @ 6:45 pm
Parker,
I did a quick check on The Stephen Co. – SPCO. I think I must be missing something that you see. While I like companies that get de-listed, hence my ORXE investment, and low volume does not scare me, I am not sure SPCO would be one of my selects. The total current assets as of Q3 2009 was $15.17 million with total liabilities of $2.62 million leaves a Net Current Asset Value of $12.55 million divided by the current outstanding shares of 4.39 million equals $2.86/share of Net Current Asset value, which is essentially what they traded for the last day they traded shares on Monday 4/12. From my perspective there is no margin of safety. That is just a quick financial take on the company. Perhaps there is more compelling investment opportunity that I am missing from just taking a quick glance at my calculator. The problem with doing a financial screen first, is that you can often miss something that is lurking in the 10k. Thanks for suggesting the idea. I would love to hear your thoughts on it.
April 16th, 2010 @ 10:24 pm
Keep in mind that I’m just an amateur invester with less than 4 years of active experience, but let me reply first of all with some philosophy of investing.
Leveraged companies scare me. They are very sensitive to mistakes in asset valuation. For example, if you find out that a leveraged company’s assets are overstated by 20%, then by definition their equity is overstated by more than 20%. In the case of a financial or other very highly leveraged company, a 10% haircut to assets could wipe out the entire equity of the company.
It is for this reason that I tend to avoid leveraged companies, because it is outside my circle of competence to estimate their assets very precisely.
For a similar reason, I love to see cash on the balance sheet. In SPCO’s case, the company was last traded at $12.1 million dollars, and reports $8.4m in cash.
I feel very comfortable with this. Even if I misvalue their other assets, the cash provides kind of an anti-leverage effect, which makes the company much easier to value.
Now on to valuing SPCO. Here are the quick numbers:
I bought SPCO @ 2.48/share in Feb 2010, but let’s take the latest trade of 2.85/share.
Market cap = 12.1m
Cash = 8.4m
Accounts Receivable = 1.2m
Inventory = 5.3m
Obsolete Inventory (under long-term assets) = 3.1m
Total Liabilites (let’s take these at face value) = 2.6m
Earnings (TTM) = 0.9m
OK. Let me look at a few scenarios:
Take the cash, and subtract all liabilities.
This leaves 5.8m cash, and is a very conservative judgement.
Compared to the 12.1m market cap, we still have to account for 12.1m – 5.8m, or 6.3m.
If we ignore all other assets, then we are essentially paying 7 times earnings for SPCO, which is not absurd. If we count receivables as cash (and ignore inventory), then we are getting SPCO at 5.6 times earnings.
If we assign inventories any kind of real value at all (say 50% of face value), then SPCO starts to look very cheap to me.
This is a super-simple valuation, but it was convincing enough to me. Primarily, it looks nicely assymetrical. With the cash and other assets, I think I am unlikely to lose a lot of money. However, there are several paths to making a nice return. These include the company performing better than expected, being bought out or going private (that cash has got to be attractive), distributing a large dividend to shareholders (typically the market rewards cash-rich companies for doing this), or the market could simply draw the same conclusions I have.
I consider SPCO to be a lo-risk, hi-uncertainty investment.
April 17th, 2010 @ 3:50 pm
Parker,
You have proven through your comments to be a very thoughtful investor, time in the saddle is not the issue it is skill and commitment. Much of this discussion is really about how we look at the same facts and where our risk tolerances lay. Much of value investing is not instinctive to most people. Buying beaten down companies in the expectation that the market has mispriced their stock. Who does that? Oh, that would be all of us who consider ourselves value investors. I wonder sometimes if I have been self limiting in my approach. Thanks for keeping it honest.
The ironic thing is just after I posted my response about SPCO, it came up on a screener for Piotroski F score companies. I will investigate it over the next few days. Thanks for keeping the conversation going. That is what this blog is for.
April 17th, 2010 @ 5:28 pm
With SPCO, I’m actually hoping that if there’s some reason not to buy that company that I haven’t already chosen to ignore, that you’ll find it and let me know
I’m curious what screener you used to find Piotroski stocks?
Thanks.
May 26th, 2010 @ 7:33 pm
Look at this small company for a great investment. WIRX just over a dollar and paying .10 div.
Was .05 last year. Talked to the company and they are increasing sales and lowering operating costs.
I have over 18M shares, the $1800 came in handy to buy more shares.
Look at the cash on hand…..wont last long in the low $1,00 range, as article in major investing arena heaps on praise, just cant find article, anybody know the article????
Charlie Star