IFON

[David Randolph]

I'm not having much luck on this kind of shots lately (I'm losing money on ONSM and MAMA), but I believe the Stocks on Fire Portfolio needs some of this fast plays to achieve a truly above average performance.

After all, the name of this website and of the Portfolio is "Stocks on Fire".

IFON certainly qualifies as a stock on fire (of course, I want to hold the majority of the portfolio in more solid and safe plays, but I also need about 10 or 20% of the portfolio in what I think can provide an attractive short term reward - do not confuse these plays with short term trading - it's different).

I've made quite an extensive due diligence on IFON on njshiva's request (the dd it is possible to make on about two hours of work). Of course I don't know all there is to know about the company, not even close, but I think I know enough to recommend it for purchase today.

The trading plan is:

Buy IFON today around the open, 6.66% of capital as usual.

Here's the dd I made on IFON:

«1. Profile

InfoSonics Corporation (IFON) distributes wireless handsets and accessories in the United States and Latin America. Its distribution and solution services include product testing, approval and certification, light assembly, warehousing, logistics services, marketing campaigns, warranty services, and end-user support. The company provides its end-to-end handset and wireless terminal solutions to network carriers, agents, resellers, distributors, independent dealers, and retailers. Infosonics was founded by Joseph Ram in 1994 and is headquartered in San Diego, California.

2. Technical Analysis
2.1. All History Chart



IFON was dead until November 2005 when it took off for a 300% gain in just about two months, after a huge gap up (this is why I don't bother all that much buying after a big gap up).

You can see the stock's history on the chart. The 50 days SMA is below the 200 days SMA, which tells me the long term trend is bearish.

2.2. Medium Term Chart



IFON has fallen quite a lot since its June highs of $17. I wonder why (I guess I'll find out soon). There was a big gap down in August that took the stock below the 200 days SMA and it has closed below that critical benchmark ever since.

The news that caused that 31% gap down was the following:

• InfoSonics quarterly profit tumbles; shares fall
at MarketWatch (Thu, Aug 10)

2.3. Short Term Chart



This stock indeed looks interesting, look at those huge gaps on the chart. This action can be referred as a bullish reversal island if the price continues to climb.

Let me just check which news made these violent technical developments:

The gap down:

• InfoSonics 3Q Profit Tumbles
AP (Thu, Nov 9)

And the gap up, on the highest volume on the company's history, was due to the following news:

• InfoSonics and LG Partner to Provide Handsets for the Caribbean and Select Countries in Latin America
Business Wire (Wed 8:30am)

I haven't read the news yet (I'll leave that to the fundamental part of the analysis). Technically there's the possibility of a bullish reversal, but for now that's just a possibility, the medium and long term trends are still bearish, perhaps the stock needs some more time to build a base.

Let's check the fundamentals.

3. Fundamental Analysis
3.1. Number of Shares Outstanding



The number of outstanding shares was steady throughout 2004 and 2005, but as the company incurred losses, they sold shares in the open market or made private placements, because the share count increased almost three fold in 2006 (these were my first thoughts when I saw the numbers).

This way a shareholder gets a double whammy of bad news, which is, the company is reporting losses (no it isn't, I saw that further down the analysis) and at the same time is diluting shareholders value by issuing more shares (so each individual share represents less and less of the company's value, hence the share price declines).

By the latest share count on November 10, the market cap is 14,120,068*$5.56 = $78.51 M.

3.2. Liquidity



The balance sheet looks acceptable. Probably there was some private placement along the way in 2006, let me see ... I can't find anything, but I found this news:

• Scott+Scott, LLC Notifies Investors of Filing Deadline: Six Business Days to Move for Lead Plaintiff Appointment in Class Action Against Infosonics Corp. -- IFON
PrimeNewswire (Fri, Aug 4)

Some problem with warrants and warrants conversion, interesting. It might explain at least part of the sudden rise in the share count.

3.3. Revenues



Wow, analysts are pretty aggressive on their revenue estimates going forward, and I bet these estimates still didn't count with yesterday's news.

The market cap is just $78.51 M, but 2007 revenue estimates are for $416 M. This is interesting. The company had $179 M in revenues in the first 3 quarters of 2006, but as with most retailers and distributors, Q4 is the strongest. The company needs to sell $52 M in Q4 to get to the $231 M 2006 estimate, this will be a peace of cake, no doubt it will beat the 2006 full year revenue number by a wide margin (it sold $67 M in Q3 alone).

3.4. Profits



Now let me read the news that caused those ugly gap downs. No surprises there, the company will probably make $0.22 EPS in 2006.

At $5.56 price per share, the earnings multiple is something like 25. The Electronics Wholesale industry average is 15.7. But IFON is growing much faster than its industry, given its growing South American presence.

Analysts estimate EPS of $0.49 for fiscal 2007, so the forward earnings multiple is 11.

4. General Overview

This company has many tricks, you can see how my analysis evolved. I guess the stock looks cheap here, but yesterday's 44% rise can't be justified by the LG news. LG is just another trademark of cell phones for the company to sell and provide logistics services, sure it is a positive development, but not a huge one, I think.

There were many confusions over warrants, a decline in EPS and all, but longer term I believe this company will come back higher, given its revenue growth rate and probably future EPS numbers.

Technically the stock might have done a bullish reversal island, with the highest volume on record (although it closed way off its highs). Perhaps the LG news is the catalyst that will turn the stock around, or else it will come back down to close the gap, since the news wasn't all that significant.

So, my indecision is on the short term, not the long term, which I consider very attractive.

I've been burned before by not paying all the attention I should to the short term, but overall I consider IFON as an attractive stock to buy at this point.

Perhaps I'll even recommend it for the 3 Stocks on Fire Portfolio today, let me just study some more issues.

Good luck njshiva

(I see now that there was a restatement of the Q1 results on June 12, 2006, reversing a $0.11 a share profit to a loss of ($0.07) - so my EPS graph and 2006 EPS comments on the analysis are wrong, the company is losing ($0.02) per share so far this year).

But my main interest with this investigation is to explain the sudden share count increase. I want to know if it was just an accounting problem (a past problem) or related to a management's attitude towards diluting shareholders value. I need to dig more ...

Finally I found the missing part of the puzzle:

«On May 30, 2006, our Board of Directors approved a two  -for-one stock split of our outstanding common stock.  The stock split was accomplished through a 100% stock dividend, providing our stockholders with one additional share of common stock for every one share held as of the record date.  The split was paid on June 19, 2006 to stockholders of record as of June 9, 2006.  Immediately following the stock split, our outstanding shares of common stock increased from 6,948,034 shares to 13,896,068 shares of common stock.»

This split is already reflected on my Metastock chart. This piece of information makes me a believer in the theory that IFON had severe problems with that restatement of the Q1 2006 results, but the future looks bright. The company is selling at a fraction of 2007 estimated revenues, to be more precise, the forward sales multiple is just $78.51 M/$416 M = 0.19. The industry average is 0.52.

Also IFON's revenue growth rate from 2006 to 2007 is estimated at 80%, and the industry average is just 9%.

I think IFON shares are quite attractive at this point.»

[HANDBALLJIM]

Shares of InfoSonics Corp. also climbed in the pre-market, as positive sentiment carried over from Wednesday's announcement that the San Diego-based cell phone distributor will sell wireless handsets in the Caribbean and certain Latin American countries for South Korea's LG Electronics.

The companies have already obtained regulatory approval and expect to begin shipping products in the next few weeks.

Kaufman Bros. Equity Research analyst SooAnn Roberts wrote in a research report the news is positive, though she expects initial shipment volume to be relatively low at 25,000 to 50,000 sets. Her estimate is for InfoSonics to ship a total of 770,000 sets in the first quarter.

After rising 43.7 percent on the Nasdaq Wednesday, the stock rose an additional 29 cents, or 5.2 percent, to $5.85 in pre-market trading Thursday.

http://biz.yahoo.com/ap/061228/premarket_movers.html?.v=1

I got in around $5.85...trying to follow your system. I have read that inexperienced investors buy at the open...and most professional traders buy at the close. What is your opinion about this? I would think each stock should be looked at in an individual basis. The heard reacts quickly on the news...bringing the stock up to uncharted waters...then large holders take profits...and shorts follow...bringing the price back down. No one really knows what the best entry is...but I seemed to get burned buying early....8 out of 10X

Thanks

[David Randolph]

I got in around $5.85...trying to follow your system. I have read that inexperienced investors buy at the open...and most professional traders buy at the close. What is your opinion about this? I would think each stock should be looked at in an individual basis. The heard reacts quickly on the news...bringing the stock up to uncharted waters...then large holders take profits...and shorts follow...bringing the price back down. No one really knows what the best entry is...but I seemed to get burned buying early....8 out of 10X

I think we should buy stocks in a way that it is pretty much indifferent to buy at the open or on close. One day of action shouldn't be crucial, or we'll become day traders or very short term traders, and that won't make anybody money over the long term.

The central basis for this trade is the revenue growth and the discount the company is trading compared to its revenues. So I want to check their revenue recognition policies. I've checked, don't see any problem there.

Also: «Days of sales outstanding (the average number of days it takes to collect revenue after a sale is made) at September 30, 2006 were 55 days, compared with 74 days at December 31, 2005. Normal payment terms require our customers to pay on a net 30-day or net 60-day basis depending on the region. We are constantly working with our customers to reduce our days of sales outstanding. The extension of net 60-day terms was required to remain competitive in several of the regions we currently operate, most notably in Central and South America.»

I guess the very low revenue multiple can be partially explained by the also very low gross margin (just 7.4% in Q3). IFON is just the middle man in the mobile phone distribution business.

But as revenue growth probably continues and the company stays profitable, I see it being worth more than just $74 M (which is the current market cap).

HANDBALLJIM's comments have made me think. I said it shouldn't be important if we buy at the open or on close. Perhaps it also shouldn't be important if we buy the stock today or just a couple of days from now, and 3 days would give me a lot more time to investigate the fundamentals of the stock (and you could also help if you have the time and the willing).

As we've seen since I came back to 3 Stocks, I guess every stock that I bought for the Stocks on Fire Portfolio went under water before taking off. I guess none of them rallied right after the initial recommendation (for example, CHINA, GOAM and SYX were down after I bought them and rose a lot later).

From now on I'll introduce a 3 days moratorium before actually recommending a stock. I'll put that stock's thread on this board as a "buy candidate" and update the initial analysis for 2 more days. Only if the initial analysis is confirmed by further analysis and thoughts, I'll recommend it for the Stocks on Fire Portfolio.

Perhaps I'll do less but better trades. That's my goal.

As for IFON ... well, I'll hold it for some more time.

[mbaugh]

David,

Have you considered using the 10 am rule to buy stocks.  If you find a stock that you want to buy or if a stock has had a huge breakout, waiting until after 10 am (10 - 10:30 am) to enter will by far give you the best entry price.  When stocks break out and opens higher I have seen it go back down to much lower levels right at 10 am and then it starts its rise again.  This would confirm a buy signal so long as it doesn't go down below its opening price during the 9:30-10 am time span.  I generally wait until 10:15 and have found this to be a good system for me.   I have seen many stocks with great news and higher opening prices rise only to fall right before 10 am and never coming back up.  If a stock is still going up after 10:15 am, then it will probably continue to newer highs throughout the day.  Good Luck! David, don't be so hard on yourself, you have been doing a GREAT job since you've been back!

[kpunarc]

Just want to be sure, are you talking about eastern standard time (New York)?

[mbaugh]

Yes, I'm talking about eastern time.  Try it on your next breakout stock.  When a stock goes up in pre-market and opens higher, sit tight and wait until after 10 am eastern time to enter.  Write down the price you would have paid had you bought it at open and compare it to the price you would pay if you wait until about 10:15.   This of course does not work all the time, but it has worked for me at least 80% of the time.

[HANDBALLJIM]

There are a lot of strategies that can be used. The other night Jim Cramer on his show mentioned this one...buying a small position 1st...then buying more if the price goes down...so you are buying more at a discounted price. He also said that tips are for waiters...and never to be used to invest. People who give you tips either have an agenda of their own, or have information that is inside info which can get you in trouble.

I was taught that averaging down is a bad move (but in my opinion if you think the stocks you own are great...why not buy more at lower prices.) Then again they would not be on fire if they were going down. 

I have met people who follow just one stock and have made a lot of money...basically you figure out the trading range. I also heard of placing buy orders in above the current price and sell orders in below the current price...just in case good news or bad news comes out. This is used in after hours trading also. I am sure someone is making money catching some of these huge biotech stock drops or pops.

Here are some excerpts from "Technical analysis from A-Z" by Steven B. Achelis

Technical analysis:
Should I buy today? What will prices be tomorrow, next week, or next year? Wouldn't investing be easy if we knew the answers to these seemingly simple questions? Alas, if you are reading this book in the hope that technical analysis has the answeres to these questions, I'm afraid I have to disappoint you early - it doesn't. However, if you are reading this book with the hope that technical analysis will improve your investing, I have good news - it will!

Fundamental analysis:
If we were all totally logical and could separate our emotions from our investment decisions, then fundamental analysis, the determination of price based on future earnings, would work magnificently. And since we would all have the same completely logical expectations, prices would change only when quarterly reports or relevant news was released. Investors would seek "overlooked" fundamental data in an effort to find undervalued securities. The hotly debated "efficient market theory" states that security prices represent everything that is known about the security at a given moment. this theory concludes that it is impossible to forecast prices, since prices already reflect everything that is currently know about the security.

[guitarman]

Hey all
Good stuff.
I've found that most stocks dip around lunch time as well.
Sometimes, I'll look at the stocks trading range over a week or three and try to guess the next dip.
I'll usually put the low ball limit order in the night before and hope it goes during the open to 10:30 craziness.
Sometimes it works but not always.
On this one, I looked at the previous day's low and put in a limit order a penny up from that (I wanted it as I want to start picking up David's picks!).
Hope that Helps.
Best
GMan

[HANDBALLJIM]

Yes you are right about lunch time (eastern standard time) even the news slows down.

Limit orders are great if you don't mind missing some opportunities...I have a bad habit of placing market orders. (I guess I am rushing to lose my money) lol

I was mostly buying stocks at support levels in 2006...and it was almost 50/50..a lot of false breakouts...and false brakedowns. The last 3 months I had changed my strategy with more active trading...which is only going to be more of a nightmare doing my taxes.

The good thing this year is after I lost 8k I was able to trade and make that money back. (In the past I might have stayed out of the market a couple of months) This was the only plus this year in my trading. It seemed everytime I figured out that I made the right move...my stock would rally...then for some reason...come back down later that day. This happened over and over...many more short term traders it seemed than long term investors this year.

Power of Long term investing: When the late President Ford took office the Dow Jones was 777 and today we are 12,463.15 and the power of being in the right place at the right time...I heard the guys who swept the floors at Google are all multimillionaires today. 

[David Randolph]

Wow, great posts on this thread

David,

Have you considered using the 10 am rule to buy stocks.  If you find a stock that you want to buy or if a stock has had a huge breakout, waiting until after 10 am (10 - 10:30 am) to enter will by far give you the best entry price.  When stocks break out and opens higher I have seen it go back down to much lower levels right at 10 am and then it starts its rise again.  This would confirm a buy signal so long as it doesn't go down below its opening price during the 9:30-10 am time span.  I generally wait until 10:15 and have found this to be a good system for me.   I have seen many stocks with great news and higher opening prices rise only to fall right before 10 am and never coming back up.  If a stock is still going up after 10:15 am, then it will probably continue to newer highs throughout the day.  Good Luck! David, don't be so hard on yourself, you have been doing a GREAT job since you've been back!

Thanks for your kind words mbaugh

In my day trader's days, most of my techniques were based on "the open is usually wrong" - on a day trading time frame, of course. Over the years I've experienced that you're both right and wrong, that is, you're right, most bullish days have better entry points during the day than the open, but you're wrong because you'll never make meaningful money on a long term basis considering those intraday issues.

Your 10 AM rule comes from your experience of watching the tape. But there's more to long term successful investing than reading the tape.

I think you're saying something like: "base your investment decisions on how the price looks at 10 AM when compared to the open". How can I make a long term investment decision based on that short term price comparison? When, hopefully, I want to hold the stock for years to come?

Of course, I can't. I could only make short term trading decisions, but unfortunately I believe short term trading is a losers game over the long run, even for the most skillful trader.

But, my decision making process for long term investments wasn't good enough either, that's why I bought MAMA, ONSM and perhaps IFON, we'll get to that in a moment. So, starting 2007, I'll introduce a "new buying process" about which I'll write on today's newsletter.

I have met people who follow just one stock and have made a lot of money...basically you figure out the trading range. I also heard of placing buy orders in above the current price and sell orders in below the current price...just in case good news or bad news comes out. This is used in after hours trading also. I am sure someone is making money catching some of these huge biotech stock drops or pops.

Someone is always making money using whatever strategy he uses. The question must be: will he be able to keep it and grow over 30 years of investments using those strategies?

Hey all
Good stuff.
I've found that most stocks dip around lunch time as well.
Sometimes, I'll look at the stocks trading range over a week or three and try to guess the next dip.
I'll usually put the low ball limit order in the night before and hope it goes during the open to 10:30 craziness.
Sometimes it works but not always.
On this one, I looked at the previous day's low and put in a limit order a penny up from that (I wanted it as I want to start picking up David's picks!).
Hope that Helps.
Best
GMan

Hi Guitarman man, thanks for your post. That is another short term timing technique that may work more times that not, but overall it doesn't make any money on a long term basis.

We're all too much share price oriented here, because ultimately, that's what makes our trading account grow or shrink over time. But using just the share price to predict the share price is not enough. It looks easy when looking at a chart, easy to predict ... the past

"If I had bought there and held for this period I would have made a ton of money". Or "If I had bought every low and sold every high of this stock I would be rich already" ... but if you/I/we could have, we would have.

The good thing this year is after I lost 8k I was able to trade and make that money back. (In the past I might have stayed out of the market a couple of months) This was the only plus this year in my trading. It seemed everytime I figured out that I made the right move...my stock would rally...then for some reason...come back down later that day. This happened over and over...many more short term traders it seemed than long term investors this year.

Power of Long term investing: When the late President Ford took office the Dow Jones was 777 and today we are 12,463.15 and the power of being in the right place at the right time...I heard the guys who swept the floors at Google are all multimillionaires today.   

Congrats on your first winning year HANDBALLJIM It's a good thing that you're thinking in years instead of weeks or months.

I had some winning years too, even when I was doing the wrong thing. Once I even bought a Porsche and a second house with my trading profits. But it didn't matter how much I won, because a few months down the road I would have a losing streak and lost it all (I was day trading futures, not stocks).

Everybody I know, and I know hundreds of traders, and read about thousands of experiences, has this same pattern, of being hot and being cold, winning and losing over time, but never really going anywhere.

The problem with not doing the right thing is that time is a limited resource. The more time we spend on the wrong strategies, the less time we'll have to apply the right strategies. And time is probably the most important factor of a successful long term strategy. The basic promise is: you need time to win this game.

I've been thinking: the economy grows at a long term average of 3% a year, the stock market (measured by the S&P500, which doesn't represent the stock market) grew 8% a year for the past 100 years (which by the way is the same long term average for profit growth). The best companies within the market can  perhaps grow at double that 8% rate, say, 16% a year.

You might think you can make more than this using short term strategies, but I guess you clearly see that's not sustainable on a long term basis. We can sometimes do it, that is, have an exceptional year, because we apply riskier strategies that unfortunately will lead to failure over the long term.

If I have the health to grow old to, say 70 or 80 years old, I want to be able to say: I was a winner in the stock market. I will only be able to say it if I, not only win, but also be able to keep those winnings over the course of an entire live span.

This post is already too long, I'll update IFON on another post, thanks for the wonderful discussion, again, on short term vs long term strategies.

[David Randolph]

I really dislike IFON's extremely low gross margin of 7.4%. IFON is the middle man of the mobile phone business, being squeezed by manufacturers and retailers.

I don't want this stock, I'm afraid the trading plan is:

SELL IFON

I'll take what, a 13 or 14% loss on the stock. But as I read this thread and the improvements made to my overall strategy for picking winning stocks, all I have to do is thank IFON.

I'll explain my "new buying process" on today's newsletter, that will prevent me from buying stocks like IFON in the future, stocks where I wasn't aware of all the fundamental information I needed when I bought it.

I don't see this trade as a mistake, but as a valuable lesson, and of course lessons cost money.

[njshiva]

looks like IFON very active pre market 

Rocket ready to launch     

[David Randolph]

looks like IFON very active pre market 

Rocket ready to launch     

Yes, some news out ... I'm on a bad luck string

But good luck to anyone still holding

[njshiva]

looks like IFON very active pre market 

Rocket ready to launch     

Ok...there is this news

InfoSonics In Distribution Pact With Samsung Elec >IFON
Dow Jones Newswires - January 04, 2007 7:51 AM ET



DOW JONES NEWSWIRES

InfoSonics Corp. (IFON) said Thursday that it entered into a distribution agreement with Samsung Electronics Argentina S.A. that allows InfoSonics to distribute Samsung wireless telecommunications devices and related accessories to carriers, retailers and agents in Argentina, Uruguay and Paraguay.

According to a filing with the Securities and Exchange Commission, the agreement has an expiration date of Dec. 31 and replaces a previous agreement which expired Dec. 31, 2006.

Shares of the San Diego wireless handset distributor's stock closed Wednesday at $5.00.

-Ingrid Pedrick Lehrfeld, Dow Jones Newswires; 202-862-1361

[guitarman]

Low gross margin is still low gross margin.
While I am in the process of re-wiring my trading synapses, this gave me an opportunity to get out on the green side!
Thanks All
GMan