What you will learn
- Whether InfoSonics is a buy.
- How Buffett calculated net nets.
- Graham Net-Net checklist review and how to find cheap stocks.
InfoSonics Corp. (IFON, Financial) has been a perennial net-net stock since the 2008 recession. I have held it before, and every two to three years it comes back on my radar as it jumps and sinks below the net-net line.
Currently InfoSonics is sitting on a market cap of $9 million.
The important question is whether the stock is cheap enough to buy after the 15% drop. Allow me to work through the company and numbers, and you will get my answer at the end.
As it stands, InfoSonics is a micro-cap with a net current asset value of $10.1 million.
For net-net type stocks like InfoSonics, I do not pay much attention to the product and business model. My method is to make sure the balance sheet is healthy and not burning cash.
It is to protect the downside.
If you are new to the InfoSonics name, however, the company sells phone cases, budget mobiles and tablets under the verykool brand, which is not very “kool” at all.
The company looks to be keeping up with market trends, which is a plus because many failing net-nets tend to have outdated business models, throw away money or sit on an empty cash box twiddling their thumbs.
What is the net-net calculation?
With any cheap stock, the balance sheet will make or break the investment. Any net-net can be a screaming deal, provided the balance sheet gives you a margin of safety.
In 1963, Buffett drew up a table for his thesis on Dempster Mill at the time he began his investment in 1961.
Buffett’s Net-Net Working Capital Calculation for Dempster Mill
Buffett owned a littler over 70% of Dempster Mill at the time, so he was able to replace management to increase the value of the balance sheet, expand his margin of safety and come out with a profit.
With InfoSonics, as a silent partner, there is no option.
With that in mind, here is my table of InfoSonics based on today’s numbers:
IFON net net calculation | source: Old School Value Analyzer
- Cash is always valued at 100%.
- Accounts receivables is set to 85% of the book value as InfoSonics do have an existing and working model.
- Inventory is set to 60% of the value as mobile phones are cheap and should easily be able to capture 60% if they needed to liquidate.
If InfoSonics had an outdated business of paying sales people to sell cassette tape players from the back of their car, the multipliers will be much lower.
I would even go as far as:
- Cash at 100%.
- Receivables at 25%.
- Inventory at 0%.
Depending on the business, the multiplier changes.
With InfoSonics, the net-net working capital is $5.64 million, NCAV is $10.1 million and market cap is $9 million.
But is this cheap enough to buy?
Do InfoSonics business numbers tell a different story?
Outside of the net-net calculation, is there anything that gives it an indication of moat, growth or something that adds to value and increases margin of safety?
Here are some quick notes as I went through the financials.
You will see my notes are “reversed” as I read the statements backwards starting with the cash flow statement, balance sheet and then income statement.
- Most sales coming from overseas.
- Free cash flow is unreliable.
- Value of accounts receivables going down is a good sign.
- Inventory levels are at a good range. Not over-bloated. Inventory in relation to inventory turnover is healthy.
- Liabilities is mostly payables.
- No share dilution.
- Losses on the income statement, but free cash flow positive in 2016.
- Big drops in gross profits. Went from 15.5% in 2015 to 11.7% at the end of 2016.
- Declining revenues.
I do not see any red flags related to manipulation in the accounting despite a bad Beneish M-Score (indicator of earnings manipulation).
The bad numbers from the financials are the result of a weak business, commodity product and big drop in margins.
InfoSonics is not a company you hold for the long term. Once it gets close to NCAV, you sell. Rinse and repeat.
InfoSonics and the Graham Net-Net Checklist
As a last check, let’s see how InfoSonics does with the Graham Net-Net Checklist.
1. Stay within circle of competence.
Pass. Sells cheap Android phones, tablets and cases.
2. No Chinese stocks.
Pass. San Diego-based company.
3. Has a valid operating business.
Pass. Not a cash box, does not deal in shady business practices. Sells budget phones mostly to Latin America.
4. Low cash burn.
Pass. Business has been able to generate positive cash. There are losses, but it is not a continuous slide to the bottom.
5. No debt or very easily manageable.
Pass. No debt. Liabilities are made up of payables.
6. No insider selling.
Pass. No insider selling.
7. Signs of buybacks
Neutral. This one is not a pass or a fail. With limited cash on hand, the company is not buying back shares.
On the other hand, it is not diluting either. Despite the tiny margins, it is managing the balance sheet.
Graham Net-Net Score: 6/7
As a net-net, it has the characteristics I am looking for.
To buy or not to buy?
If you bought InfoSonics at the beginning of the year when it was below 40 cents, your position would look like this.
IFON 2017 YTD
Not bad for an ugly net-net.
But it also is not an easy ride if you check your portfolio constantly.
You would be up 100%, then up only 30% to see it go up to 100% again, only to experience another gut-wrenching drop.
The ups and downs with net-nets are vomit worthy. If you can ignore stock prices and focus on the value, however, you will be up 64% even with the 15% drop yesterday.
At the current price of 62 cents a share, however, it is too high to buy.
Unless the company's new phone becomes a mega hit, it does not have a brand or product to justify consistent positive growth that would improve margin of safety and justify the current price tag.
Looking for other cheap stocks
While I wait for InfoSonics to trade lower, here’s how I look up other cheap stock ideas.
NCAV Stock Screener at Old School Value | click to enlarge
Set Price to NCAV between 0-1. It’s the best range to be searching in.
Set NCAV Margin of safety between 0.01% to 100%. If you set it to 0%, you will also list all the non-NCAV stocks, too.
These filters alone will cast a wide enough but specialized net.
I have gone overSears Hometown (SHOS, Financial), but InfoSonics is a better net-net and one I am willing to buy at the right price.
Summing up
- Revisiting past stock ideas is good practice.
- Cheap stocks can make you money – even in this market.
- Adjust and apply Graham’s Net-Net calculations to match your assumptions of the business.
- It is OK to pass on stocks.
- Keep searching and building your knowledge bank of ideas.
Disclosure: No positions held.
Start a free 7-day trial of Premium Membership to GuruFocus.
