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.

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In January ENWV bought back all the preferred shares from Oak Investments for $36 million. This was discounted from Oak’s original Investment by $9 million. This was a huge step in the right direction for shareholders for two reasons. First, it took the slightly submerged overhang of the preferred shares off the books, and at a discount. But more importantly the company is not beholden to Oak any more. This frees the company to be acquired by another company. That is not a prediction. But another company did not really have the option prior to the buy out of the preferred shares.

Since then, a whole lot interest has been paid to ENWV. On 2/8/10 Dimensional Advisors disclosed a 7.8% position in the company. On 2/10/10 Portolan Investment disclosed a 4.3% position in the company. On 2/16/10 Potomac Capital disclosed a 6.19% position. Empire has also increased its holdings, although some of that may have been a year end loss, and repurchase after 30 days. In any case, if you are the type of investor that likes to see other investors buying, then you would like this news. I am only interested in what investors I respect are doing, or company officers. Nothing in the 13G/A’s to indicate management is interested in their own stock.

I estimate their current NCAV value at $3.19- $3.52, depending on how you calculate it. Taking the Graham Margin of Safety of 33% gives you a purchase price somewhere around $2.32 on the high side. The shares closed yesterday at $2.60/share. But if you are willing to take a smaller margin of safety you might be interested. But I would caution you as always to think twice before making any investment. Do your own research. Double check everything. Since ENWV is still losing money on operations of $3.4 million per quarter, as reported in their latest 8k, ENWV still seems like a risky proposition to me.

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CLRS is essentially a shell company with Net Current Asset value of approx. $4.78/share. All its assets are either cash or short term investments. At its closing price of $4.45 today, it is trading at a small discount to its NCAV value.

I first looked at CLRS about a year ago, when the Net Asset value was a little better and the stock price was lower. I never pushed the button on the stock, because it seemed that Kanders (CEO and major investor) had a fair amount of time back then to make an acquisition, but had failed to do anything except burn cash. The Net Operating Lossess (NOL) will continue to expire each year and there is a small cash burn while nothing is going on.  I do not know how one evaluates or values NOL’s, so I cannot confirm or deny Shadowstock’s estimates of $1.30/share.

While there is some small downside protection, on an asset valuation, everything else about the company seems speculative, including what type of business it might acquire or whether or not it will acquire another company at all. Since it is neither profitable nor does it have a sufficient margin of safety, CLRS is a pass for the moment.

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According to their website Tegal Corp, “designs, manufactures, markets and services plasma etch and deposition systems that enable the production of IC memory and related microelectronics devices used in personal computers, wireless voice and data telecommunications, radio frequency identification devices (RFID), smart cards, data storage and nano-scale actuators.”

Why buy TGAL? Don’t. Net Operating losses coupled with a decrease in cash, a  huge write down of account receivables is a game changer.

1) NCAV stock. This is the third time this week. And although it is technically still a Net Current Asset Value stock, the Margin of safety has slipped below what I am comfortable with. My estimated Net Net value is between $1.09 and $1.47. Given today’s write down, the lower end of the range is more appropriate. The only real question for an asset based investor, is does Tegal have any other qualities that make it worth investing in.

2) Guru Investors- As of October Bonanza Capital owned 3% the latest 13g Lloyd Miller III controlled more than 8% of the stock. And as of the 12/10/09 13g filing Special Situations technology Fund II owns 20%. It will be interesting to see if these investors hold on.

Risks? numerous.

1) Continuing losses. Enough said about that.

2) continuing asset deterioration. It is a bad sign when a company is losing money and writing off assets as losses. Run, don’t walk.

3) Management double talk. Today’s press release included the following, “In a still challenging market, our efforts to grow our DRIE business on the strong technology platform acquired from Alcatel are clearly paying dividends as we continue to make progress with new and existing customers. The sequential and year-over-year increase in revenues, along with our very tight control on expenses, resulted in a cash positive operating quarter for the first time since March of 2008,” said Thomas Mika, President & CEO. “Our GAAP results included an impairment provision resulting from the application of FAS 144, but we believe that this is prudent as we continue to pursue possible strategic alternatives, including the sale of certain product lines and related IP. We are determined to continue streamlining our profitable operations and conserving our solid cash position during a period of significant transition for the Company.” An impairment is prudent? That is double speak if I ever heard it.

Don’t make the mistake I made. This is a classic example of why a value investor sells a stock. Either you achieve your target price or the underlying intrinsic value changes. That is what happened with TGAL. I will exit my position tomorrow.

Disclaimer: Yes I own this piece of shit (POS). But I will sell as quickly as I can.

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Linktone is, according to their latest 6k, ” one of the leading providers of wireless interactive entertainment services to consumers in China.  Linktone provides a diverse portfolio of services to wireless consumers and corporate customers, with a particular focus on media, entertainment and communications.  These services are promoted through the Company’s strong distribution network, integrated service platform and multiple marketing sales channels, as well as through the networks of the mobile operators in China.  Through in-house development and alliances with international and local branded content partners, the Company develops, aggregates, and distributes innovative and engaging products to maximize the breadth, quality and diversity of its offerings.” Linktone is based in China. But don’t hold that against them.

Why buy LTON?

1) Net Net stock. I know I sound like a broken record. But I love NCAV stocks. As a group they tend to outperform the general market. My estimate of  Net Current Asset Value is between $2.46 – $2.63/share, depending on if you use Graham’s original formula or a modified version of the formula.  More importantly, for LTON is to include Graham’s margin of safety which was always 1/3. That puts the buy price at between $1.62 & $1.73/share. My buy price being on the high side of this range.

2) Linktone is a technology/media company. I like these kind of companies because often there are larger positive swings in the stock price, to the upside when a positive surprise is announced.

3) LTON has regained profitability according to their 6k dated 12/4/09. Although it is not explosive it has improved from it’s losses of 2008. Also in the same 6k, “Gross margin increased to 39% of net revenues, or gross revenues minus business tax, compared with 34% for the second quarter of 2009. The sequential increase was primarily due to relatively higher profit margin service fees from Linktone’s Indonesia VAS project.”

Risks?

1) Chinese stock. If you believe the bubbles scenarios, then the whole Chinese market needs a major correction. I am not buying the whole Chinese stock market, but  a piece of this one asset rich company.

2) Dilutive share practice- The number of shares of LTON has increased from approx 23 million ADS shares in 2007 to over 42 million in Q3 of 2009.

3) Growth Through acquistions- As I have stated previously, I am not a big fan of growth through acquistion. LTON purchased 50.1% of  Letang a Chinese, a mobile gaming company. The terms have not been fully disclosed but it seems their is only a couple million cash down. I am reserving judgement on this purchase.

Disclaimer: I own shares of LTON. I wasn’t discussing this company hypothetically. Whether you should buy this stock is entirely up to you. You shouldn’t trust anyone without doing your own research. Yeah, even if that person is me. I am not obliged to notify you in any fashion if I change my mind about this stock. Although since this is a personal blog, the only that would prevent me is probably my paying job.

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After rising to $2.40 from my purchase price of $2.22 the prices have slipped back down to $2.26 again. I discovered a mistake I had made in the original calculations I used for my valuation. I did not have the correct number of shares in my calculations, which when corrected brought the original NCAV value down to  between $2.51 and $2.85. Based on this latest 10Q I estimate the Net Value at between $2.42 and $3.03, definitely toward the higher end of the range. But it has growing Free Cash Flow and because of its micro cap status, no one is following it. The potential catalyst is a surprise in earnings or something that would catch an analyst attention. We will probably have to wait another quarter on this one to see much movement in the price.

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If you read the google Finance news on XING, you would say nothing recently was really going on. Just the usual Momentum stuff. Back in December they had an article where XING sent out a Press release with  their unadited results of their “molybdenum mine… and actual operating results are better than our initial forecast.” This was important because the CEO Wu is not much trusted by many shareholders and it wasn’t clear the recent purchase of China Luxuriant Jade Company and XING’s foray into Molybdenum mining was gong to produce revenue. Any revenue. The press release shows that they did and that it was profitable. A sigh of relief from some investors, including me, since the Molybdenum mining operation was one of the items I considered a risk.

Yahoo finance showed even less information. Nothing since December. Sometimes these small cap Net Net stocks will rise on no news, particularly if they are thinly traded like SODI.

But when I dug a little deeper I think I found a reason for the increasing volume and price movement. An article on Seeking Alpha entitled Molybdenum Poised for Massive Comeback, spoke of the under performance of Molybdenum or Moly as it is known affectionately. The price discrepancy when compared to copper was attributed to the fact that Moly has no futures market. This will all change next month, according to the article, when Moly gets a futures slot on the London Metals Exchange (LME). The thinking is that speculators may come in and restore the “normal” price relationship to other precious metals. The Seeking Alpha article says, “Moly a year ago was trading at 8.5x the price of copper, now it’s only 3.5x the price. Moly to nickel was at 2.6x, now at 1.4x. At molybdenum’s peak in 2005, it was trading at a price 28 times that of copper.”

Since XING has been repositioning itself as a mining company, as it divests itself of its phone operations, the price rise may be anticipating some future commodity heat from Moly when it becomes traded as future. I don’t know anything about precious metal trading and have no way of evaluating the company on that basis. I do know that it XING is still a NCAV company and despite the run up in the last month still has an estimated Net Current Asset Value of $4.28/share. This means there is still the required 33% discount off of Net Net value, for your margin of safety.

Disclaimer: As I stated I own 1500 shares of XING. I am not a finance expert, I am a film and television producer. I strongly urge anyone who is interested in XING to do your own research before you invest.  Make sure you understand why you are investing in a company and when you will get out of the investment.

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MNDO is an Israeli company that, “a leading provider of convergent end-to-end billing and customer care product based solutions for service providers as well as telecom expense management (call management) solutions.”

As usual I went to Morningstar  TTM and latest year information including 3rd Quarter (Q3) Balance sheet info. Mind had $34.6 million in current assets and just $6.9 million in total liabilities for a Net Asset Value of $27.7 Million. MNDO has a little over 19 million shares making per share NCAV value (unadjusted) of approximately $1.45/share. So far, so good.

Then I went to the latest 6k, which is a form used for “reports by foreign issuers.” MNDO has just issued a special dividend of $.80/share in December. So the NCAV value isn’t $1.45/share it is closer to $.62/share. MNDO is no longer a Net Net company. Does that mean it is not worth investing in? I can’t tell you. But this example points out why you must read the SEC paperwork yourself. In this case Morningstar Q3 balance sheet was accurate, but no longer current. In MNDO’s case it made a very big difference and it is clear why it recently appearted on the screener I was using.

Mind C.T.I. needs further evaluation to see if it is worthwhile on either Discounted Cash flow basis or Low price to book basis. Both of these require more research, which I will try to do this week.

Disclaimer: I obviously did not purchase shares of MNDO, because it has not met my investing criteria so far. That does not mean it won’t in the future. Make sure you always do your own research and don’t make investment decisions based on something someone else tells you.

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Please note this is a lot longer post than usual, so if you have a short attention span, wait until tomorrow.

I first learned about Endwave a couple of months ago from the GuruFocus NCAV newsletter which I have posted about previously.  It looked very exciting. It was trading at around $2.50/share when I first noticed it. And ultimately, if you like the ENWV it has fallen in price since then, to close yesterday at $2.36.  Gurufocus estimated the Net Net value was $5.65. Wow, what an upside, I thought. I evaluated the company strictly from their financial reports and came up with an intrinsic value of $5.51. But given how few spectacular deals I see around right now, I definitely thought ENWV needed a more thorough investigation. Something didn’t smell right.

In their 10k Endwave says of themselves that they “design, manufacture and market radio frequency, or RF, modules that enable the transmission, reception and processing of high frequency signals. Our target markets include telecommunication networks, defense electronics, homeland security systems, electronic instrumentation and other applications that require high frequency RF circuitry and subsystems. ” O.k., so there business is out of my expertise. Again, if the margin of error is big enough I will make an exception to this rule.

In a nod to Philip A Fisher I started with a little scuttlebutt work. And the thing I learned right away is that ENWV’s management has some very dissatisfied investors. This is the complete contrast to Solitron Devices, whose investors by and large seem to be happy with management despite the low share price. This post from seeyanever on the Yahoo forum in September:

“Ed (Keible, then CEO) announces first Q revs of 12 million in April. At this time he tells us he has sold the D&S business to help position the Co. for further growth.

Ed announces second Q revs of 5 million in July and tells us the Co. is going to reprice options for all employees and managers from any price above $5 down to current price $2.35 in order to MOTIVATE them to do a good job. Gives guidance of 4 million in order to set the bar low enough to meet expectations.

Ed tells us in Sept ( after option repricing ) that the Co. now thinks revs for Q3 will really be 2.5 million.

In my world this would get you FIRED. In Ed’s world this gets you promoted.

WTF…………….”

This post brings up two issues that are worth noting. First is management compensation. With my recent VaxGen experience, I have become hyper attentive to management, particularly how they can effect the down side. As I posted yesterday, management is important, not just that they are ethical, but that their interests in line with shareholders. So when you see Management enriching themselves while stockholders are suffering, management is clearly flipping the bird to investors.

In another yahoo forum posting from playon5984 (his caps not mine. I told you they were not happy), “HERE IS WHAT THE EXECS AT THIS COMPANY MAKE WHEN SALES THIS QUARTER ARE $2.5 MILLION. ED’S SALARY PRORATED IS ABOUT 225K THIS QUARTER PLUS BENEFITS. SO 10% OF COMPANY SALES (THAT IS SALES NOT PROFITS) GOES TO PAY ED’S SALARY THIS QUARTER! ” I could go on. Reducing option prices for management as the stock price plummets and revenues jump off a cliff can in no way be construed as stockholder friendly. At the end of October Endwave issued an 8k announcing that Mr Keible would be stepping down from the position of CEO, but would entitled to a full severance package. He was replaced by John Mikulsky as president and chief executive officer. Mr. Mikulsky was previously the COO. In fact as of today the Endwave website still lists Keible as CEO, so this is in effect no change in the course of management and not a cause for celebration shareholders.

But, enough said on the management front. This was enough for me to opt out. The clear management approach has been to enrich themselves at shareholder expense without much, or any plan for achieving profitability or growing the company.

But I continued to search. With a company that is this beaten down it would not take much good news for their to be big swing to the positive. With a big enough margin of safety even a clown could extract some value for shareholders.

That brings us to other point from seeyanever‘s post. In April 2009 Endwave” sold its defense and security business to Microsemi Corporation (“Microsemi”)” for $28 million in cash. The question is what does that leave left? According to their latest 10Q “Subsequent to the divesture (sic) of our defense and security business, we depend on the mobile communication industry for substantially all of our revenues.” Moreover ENWV further discloses that all their eggs are essentially in a basket of three companies, “For the three months ended September 30, 2009, Nokia Siemens Networks and its manufacturing partner, SRI Radio Systems, Nera and Flextronics accounted for 42%, 35% and 14%, respectively, of the Company’s total revenues.”

What is Endwave’s plan moving forward. Again from their latest 10Q “One of our strategies is to grow through acquisitions. To that end, we have completed six acquisitions since our initial public offering in October 2000. We intend to continue to pursue acquisitions in our markets that we believe will be beneficial to our business.” The problem is that since they sold the division responsible for the bulk of revenues they have had eight months and made no acquisitions or present a clearly focused plan. I am not a fan of growing a company exclusively through acquisitions, which it seems Endwave’s strategy is based on. I think it is often costly and is unlikely to add shareholder value. But it does make management look busy.

Let’s turn to Endwave’s financials. According to their latest 10Q 3rd Quarter revenue was $3.1 which was a drop of 45% from the previous quarters income of $5.6 million and a 70% drop from their year over year 3rd Quarter revenue. Meanwhile their losses are skyrocketing.  Operating losses in Trailing Twelve Months (TTM) are $22.1 million compared to $16.1 million for 2008. Given that the trend is still toward the negative, one cannot expect them to remain a Net Net company long, particularly if they do make an acquisition.

Finally, let’s turn to the issue of the Preferred shares that were purchased by Oak Investment Partners XI. They purchased 90,000 preferred shares and warrants to purchase additional shares, which have since expired, for $45 million.  These are unusual preferred shares and from a Net Net valuation perspective, and  ultimately, diluting to common shareholders. Oak has the right to convert to common shares at any time at a ratio of 10 common share per preferred share at an exercise price of $15/share. Preferred shareholders get to vote as if their stock had been converted to common stock and get a seat on the board of directors. No problems so far. In the event of “Liquidation (as hereinafter defined), prior to and in preference to other classes or series of Endwave’s capital stock, the amount initially invested plus all accumulated or accrued and unpaid dividends.” According to the original 8k from 2006, this also includes “a merger, reorganization or consolidation.” Thus in a worse case scenario one must deduct the $45 million that Oak invested from the Assets to arrive at a true Net net calculation. Once done Endwave’s true Net Current Asset value is approx. $2.56/share. This is no longer the thumper deal it originally seemed. It doesn’t even qualify as an investible Net Net with the 33% discount off Net Net Value. This is also a lesson in why it is essential to read the actual SEC documents and not just go by the financial statements. Yes it takes more time. But the difference in this case is Enormous.

Looking forward, not only is future dim, but it seems the cash burn will extend into the future as far as the eye can see. Moreover ENWV has nothing in place that looks like it can turn the company around.

But here is the only important question. Does any of that matter? That I leave to you. I have already said I did not invest in Endwave. That doesn’t mean I won’t in the future. But something needs to change before I will.

Please note that I have posted an update to this analysis. Please check it out ENWV an update.

Disclaimer: As usual, please don’t be an idiot and make investment decisions based on what someone writes on the internet, even me. Even if you think it is genius. Even if you agree with me, please do your own research. Like anyone else, anything I write is subject to human error. This is an educational website and not meant as investment advice in the legally binding sense of the word. I am, after all, a part time investor working in the film business.

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Nu Horizons”is a leading global distributor of advanced technology semiconductor, display, illumination, power and system solutions to a wide variety of commercial original equipment manufacturers (OEMs) and electronic manufacturing services providers (EMS). With sales facilities in 54 locations across North America, Europe and Asia and regional logistics centers throughout the globe.“

But unlike SODI from earlier in the week, Nu Horizons has some big buts about its NCAV status. Technology stocks, particular semiconductor companies can have inventory issues. If you have too great an inventory, you could be stuck with am obselete product that no one wants at any price. Too little inventories and you have pissed off customers. NUHC definitely doesn’t suffer from the latter. $191 million of its $221 million are in inventory and account receivables. Although inventories in TTM have declined their account receivables have decline only slightly. Moreover, NUHC was unprofitable in fiscal 2009 and only eeked out a small profit in the latest Quarter. For the optimistic that is a sign of hope.

Unfortunately, for me their stock price has more than quadrupled from its 52 week low to $4.22 closing yesterday. And when I discount inventories and Accounts receivable, not even at liquidation value, I get a stock that is trading above it’s Net Net value and with no margin of safety. This of course does not mean NUHC is a bad company or that they are not worth investing in. That is each investors choice. But I don’t understand its business model or the viability of its products in the long term or how quickly they will become obsolete. Thus, I won’t invest in NUHC.

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