Compounding Life » IGOI

Thoughts on selling stocks, margin of safety and Mr. Market.

KC — Sun, 16 Jan 2011 01:53:49 +0000

Recently two stocks I sold have had been on a tear. I sold Value Vision (VVTV) and IGO (IGOI) for some pretty substantial gains. I sold IGOI for a %120 gain after holding it for 5 months in a tax deferred account. I unwound VVTV in lots ranging from %870 to %300 gains in taxable and tax deferred accounts. The proceeds were re-invested in other positions which have performed well but in the short term I left some money on the table by not keeping the positions I had. Keyword here being short term.

I spend a lot of time thinking about my actions trying to determine if I made the right or wrong decision and if I made wrong decision, what lesson I need to take from the experience to apply to future endeavors. So of course one of the questions I asked myself is did I sell too early?

One thing I try to remind myself of in situations like this is “What the market does after you open or close a position really has no bearing on the quality of your decision.” While I would like to take credit for that thought, I imagine it was probably inspired by something I read from someone much wiser and with more experience under their belt. In essence what I am trying to say is that especially in the short term you should not use the market to judge your decisions. Even though the market values VVTV at over $7 and IGOI at over $4, that is not an indication on the quality of my decision to sell at cheaper prices.

Why? The answer really boils down to my investment philosophy. I started investing because I felt I strongly identified with the value investing framework. It makes sense to me and I feel confident that if applied with discipline it can lead to superior performance. While there are many interpretations of the value investing framework, one of the core tenets of value investing is the “Margin of Safety”. Buffett’s early investment style was influenced by his mentor Ben Graham. His style today is probably influenced by many people, two of which are Phil Fisher and his long time partner at Berkshire Charlie Munger. As his style has evolved the margin of safety is still a key component.

I entered both of these positions because I felt they provided adequate margins of safety trading at good discounts to their liquidation value and in both cases the companies had the chance turn around their business as an ongoing concern. So far they have both been making good progress and the market is treating them nicely for that progress. However lets not forget that these are not fantastic businesses with strong moats. So in my case, I bought them at discount to their value dead and got a premium because things worked out well. If only all situations could work out that way!

Both of these companies have a chance of success however once the margin of safety is gone there is nothing to backstop the value. Both of these companies have to execute with little or no error to continue on the upward path they are on. In this case the value the market puts on their progress is of no concern to me, what is of concern is the companies strength and the margin of safety I have if I hold.

Buffett has said that the best businesses are ones that can be run by a ham sandwich, because someday a ham sandwich will run them. I did not enter these positions because of their great business, I entered them because the market was selling them a large discount. They were Graham style cigar butts.

In the event that they enjoy great success long term the shares will appreciate accordingly, however in the event that they fail there is a higher risk of capital loss than I am comfortable with. Unlike companies with strong moats they can’t afford to make mistakes for a year or two. They must do a lot of things right.

So in conclusion when thinking about selling stocks do not think about the market. Think about the business and the margin of safety it offers at its current price. If you do that you will probably be right more often than you are wrong.

Disclosure: No positions in the stocks mentioned in this article.

Unconventional Investment Research

KC — Mon, 19 Oct 2009 08:33:40 +0000

As I mentioned in my earlier post I recently read One Up On Wall Street : How To Use What You Already Know To Make Money In The Market by Peter Lynch. Peter Lynch took over the Fidelity Magellan Fund in 1977 when it had $18 million in assets. When he stepped down from managing the fund in 1990 he achieved an averaged %29.2 return and the funds assets sat at $14 billion in assets.

Lynch’s investment style varies quite a bit from the traditional super value investors. Lynch seems more likely to invest in public offerings or companies that have little operating history if he feels they have potential for serious growth. Lynch is willing to take a little risk on situations where there is some uncertainty so some people might call him a “growth” investor. That being said I try to ignore categorizing investors into buckets like “growth” and “value”. Instead I categorize them into two buckets “good” and “not so good”. Looking at his record Lynch falls in the “good” bucket. I can’t imagine how much work it must be to manage a fund with billions of dollars in assets, over 1000 positions and on top of it providing returns that outperform the market.

One point that Lynch makes again and again is that you should always use whatever edge you have over Wall Street. If you work in in a particular industry and have a finger on its heart beat, you have an edge over people sitting in front of a Bloomberg terminal all day who may invest or trade in that sector. In the book Lynch mentions examples of great companies that he identified before Wall Street simply by being a typical consumer. Lynch also mentions some of his follies, such as the sandwich shop he ate lunch at that made a public offering. He bought in because he felt he had an edge on predicting the success of their business. They found out the hard way that their sandwich shop format did not go over well in other cities as the expense of the shareholders who bought the stock offering.

I walked away from Lynch’s book thinking primarily about one thing. What unconventional research tools are available to investors? When I say unconventional I mean anything that gives you information a typical investor or money manager might not get from the annual reports or SEC filings. Here are a few examples of some unconventional and some more conventional but under utilized tools that might help give you an edge.

The Phone

This is not really unconventional, but I think underutilized. I personally have not exercised this option as much as I would like to but I think after reading Lynch’s book I probably will.

Does the company in question sell a product? Call your local retailers to see if its in stock. While your at it strike up a conversation and ask the sale people if the product has been selling well.

Does the company have a phone number for investor relations? If you have questions not answered in the annual reports this could be a good place to start asking. If they don’t have a phone number you can call the main exchange, ask the operator to transfer you to investor relations and see what happens. You might get put in contact with someone that could give you some good information on the company. In the case of smaller companies you might even end up talking to the CEO or CFO.

Email

Same the idea here. There was a risk arbitrage situation I was interested in and I was trying to get a little more information about when the company expected to complete the transaction. I emailed investor relations at the company supposedly making the purchase and my email to their investor relations address bounced because the person who answered that address was no longer with the company. While this doesn’t give me any information about the merger it could be an indication of how much or little effort they put into informing shareholders. On the flip side I have emailed investor relations at other companies and gotten immediate responses from an actual human being, sometimes with decent answers to my questions! That is always a good sign.

Web stats

In my previous post about IGOI I mentioned that I went to a local retailer to see what their in store marketing and placement looked like. Another bit of research I did was related to their online store. In their conference call from last quarter the CEO mentioned that they are engaging in a more direct to customer marketing campaign. They launched a new online store where customers can buy product directly from the company cutting out the middle man and resulting in higher margins for IGO. When I heard that I decided to go to Alexa and see what they said about traffic going to the IGO website.

Here is what they had to say:

The one thing this tells me is that traffic to their online store is not growing. For a company attempting to reach customers directly I don’t find this encouraging. Another thing I looked at is their online advertising. If I do a google search for IGO, I see an sponsored link for IGO’s website. They are paying to show advertisements for people who search for “igo” even though their site is the first organic (non advertisement) search result. Now if I do a search for “universal laptop power supply” I don’t see an ad for IGO. I refresh a couple of times, still no IGO ad. This makes me wonder if they have a handle on their online advertising campaign. Next I do a search for “netbook power supply” and first time I don’t see an IGO ad, I refresh and I start seeing their ads. At least they are going after netbook customers, but I still get the feeling that if they are really trying to reach more customers directly their online advertising strategy might need some refinement. Any one of these things on their own don’t provide a ton of data, but as you start to add them up you can start to draw a picture of how well the company is aligned with their mission. It is possible that they are just gearing up their online business, in which case now that I have this information I can monitor it accordingly and this can give me an edge on how the company is doing. We already know that they are loosing their biggest customer (Targus) and they need to make revenue up some where. If their Alexa stats start growing this might be an indication that they are on the right track.

Street View

In some cases Google Street View can be a good tool for checking out the company headquarters of smaller companies. Is it a fancy building? Is it a dump? Does it even exist? Unfortunately street view only works in major US cities and this information in a lot of cases could be of minimal use, but you never know what you may find.

Here is the Vaxgen (VXGN) office (I liquidation situation I had a position in):

View Larger Map

Here is a Berkshire Hathaway in Omaha, Nebraska:

View Larger Map

LinkedIn

LinkedIn is a professional social network. Facebook for corporate America. One of the ideas I had for LinkedIn was using it as a tool research company management. If a CEO or other executive is on LinkedIn there is a good chance his or her employment history is on their profile. Are their previous companies still around or did they run them into the ground? This could be a good starting point for finding out more about executives in small companies.

Obviously these tools on their own will not tell you what stocks to buy or sell. However they can potentially provide some value when used in conjunction with your normal investment research.

IGOI: Should I stay or should IGO?

KC — Fri, 25 Sep 2009 22:19:14 +0000

IGO (symbol IGOI) devlops and markets power accessories for electronic devices such as laptops, mp3 players and mobile phones. See their corporate website for a more detailed company description.

I initially learned about IGO from an excellent post on OldSchoolValue.com. At the time it was trading below its liquidation value making it a cigar butt with at least one good puff left as long as the management did not blow all the cash. The management has shown good signs of cost containment and even increased it cash position despite dwindling revenues.

I bought IGOI at $0.58 and while it has traded above my cost basis for the majority of the time I held it, it recently jumped up as high $1.30. Looking at almost %120 gain in 6 months I decided to reevaluate my position and see if I should continue to hold to this company now that it’s trading at a premium to what I believe to be its liquidation value.

I decided to evaluate the pros, cons and facts:

I bought this stock because it was a net net. It is now trading above the estimated liquidation value.

Company has winded down their contract with Targus (largest customer) which accounted for approximately %40 of revenue

IGO does not have a good track record, however newer management is showing it knows how to control costs.

IGO just announced their new small universal netbook charger will be sold in Verizon stores in the coming weeks

IGO is working on a new product line of power strips that will automatically manage vampire power loads. Using a patented circuit that detects vampire loads and powers off the outlet.

IGO is aiming to be a power management solutions provider and hoping to sell their new products like power strips to corporate enterprises.

IGO is attempting to make their patented “tip” technology for swappable power supply tips a defacto standard. If this happens they can license their tip design to other companies and rake in the dough

Most of this information I had learned from their most recent conference call so I decided to go back and listen to it again. I have to tell you when I listened to the call the second time I started thinking about the possibilities of the new products. I was caught hook, line and sinker. Supposedly their new power strips will be the only product on the market that can auto detect and shutdown vampire loads, they have a patent pending on the circuit design. To boot netbook sales are good so their new netbook charger could be hot. This turn around could be a 10 bagger easily!

After the excitement wore off I decided to take another look at the situation while not intoxicated by thoughts of 10 baggers. A couple of things came to mind right away, one is Warren Buffets opinion on turn arounds.

Turn-arounds’ rarely turn around

Yes IGO sitting a world of opportunity but that does not mean that they will be able to capitalize on it. Being in the tech industry I have worked for companies that have had great ideas and products but still don’t succeed. Vampire loads are just beginning to get media coverage and its uncertain if consumers will be willing to pay a premium to shave a few bucks a year off their power bill.

A day or two before going through this exercise I was flying back to Seattle from a business trip and I read Peter Lynch’s book “One Up on Wall St.”. Peter is a big of fan of hands on investment research. I decided to listen to him and see if the proof was in the pudding. I had do to hit the streets to do some investigation. Unfortunately my local Verizon store does not yet have the netbook chargers so I couldn’t ask them about initial sales or even buy one to evaluate it. Next I decided to go Fry’s Electronics and see if I could buy one of their universal laptop chargers.

Here is what I saw at Frys:

Both Targus and Belkin had end cap displays for their universal laptop chargers.

On the wall of the universal chargers IGO has two slots among 15-20 products, competition is tight.

While at Fry’s I watched two different parties buy laptop chargers both went for the cheapest one available

Belkin already has power strips targeted at vampire power in the store. They don’t automatically switch off. Instead they have a tiny remote that allows you to power off all vampire outlets on all power strips from one place. While not as slick as the solution IGO is working on, they are most certainly ahead of the game in getting product out and most certainly working a product that does what IGO’s will do.

I perused the wireless phone charger section since IGO makes products in that space. No IGO phone chargers at Frys, but it was still time well spent because it reinforced in my head how much a of a commodity market phone chargers are.

Finally I decided to plop down $70 for their universal laptop charger with tip technology. I can always use an extra laptop power supply and it would give me a chance to evaluate their product.

After this research trip it makes perfect sense to me why IGO has done ok at Radio Shack and the ATT store where there product is the probably the only choice. They had no marketing Frys, a sales person is going to take you right to Belkin or Targus. If you don’t talk to a sales person you will probably just buy the cheapest thing you find.

As far as new products like the vampire load power strips, from what I have seen I don’t think IGO will be able to effectively educate the customers as to why their product is better. In my opinion IGO runs a risk of not being able effectively execute their new strategy.

If you own a stock that sells in retail, visiting a store and looking at their product and how its displayed can be a really big eye opener. So that is why I decided to take my profit while it was there, I felt if I held on any longer I would be speculating.

Disclosure: I sold my IGO position two days prior to writing this article.