Compounding Life » value

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.

Oak Value Fund Reports

KC — Thu, 12 Feb 2009 22:20:29 +0000

Lately I have been reading the quarterly and annual reports from the “Oak Value Fund”. Not because I am interested in investing in their fund but because they are well written reports that summarize the market weather from the perspective of a value investor and they go into good details about their holdings and their reasons for buying or selling their positions.

The Oak Value reports are reminiscent of the Berkshire Hathaway annual letter to shareholders but offer yet another perspective because they do not buy entire companies and they will open and close positions more often.

I reiterate, I have no intentions of investing in this fund nor do I make any recommendation that any one else does. I just feel there is some good reading in their reports. One interesting note is that OAKVX is a fairly small fund with only around 58 million is assets.

Random thoughts on BNI

KC — Sun, 25 Jan 2009 20:50:49 +0000

Burlington Northern Santa Fe has been getting some attention because Buffet has been steadily increasing his position. This past week another purchase of approximately 4 million shares was reported:

NATIONAL INDEMNITY CO 10% owner 1,800,000 $62.19 $1.11946E8 7.1889E7

NATIONAL INDEMNITY CO 10% owner 681,000 $63.43 $4.31969E7 7.257E7

NATIONAL INDEMNITY CO 10% owner 1,882,000 $61.65 $1.16031E8 7.4452E7

It should be noted that National Indemnity is a Berkshire Hathaway company. It’s an Omaha based insurance company that Buffet purchased on behalf of Berkshire. If memory serves correct I believe this was one of first insurance companies he purchased and hence the beginning of his “float” investing career. The story of Buffett and National Indemnity is covered in some detail in “The Snowball” which I would highly reccomend reading.

The only reason I bring this up is because when reading information about insider purchases and sales you have to keep in mind that it might not always be clear who is purchasing the stock. In this case someone not familiar with Berkshire and it’s history of buying BNI stock might not realize who is actually making the purchase. As far as insider information goes InsiderCrow is the best site I have found so far for that info but please let me know if you have any others you use. Insider filings are available from the SEC site, but the search functionality on InsiderCrow is far better.

Back to BNI. Well I think there are two major things to consider:

1. Rail is the cheapest way to move goods across the country. When people start spending money again and gas prices work their way back up (both of which will happen eventually, nay sayers be damned) railroads will be in high demand.

2. Moat. This is a no brainer. When it come to moats railroads have it locked down. The threat to their competitive advantage (Moat) is that a cheaper way to move goods comes along.

Riding on Coattails

Warren Buffett has talked about “riding on coattails”. Well here is a situation where it may be possible to ride on his. We know what Berkshire has paid for all of its BNI stock. So we can come up with an idea of what he considers to be a “fair” price. One thing to keep in mind is that in some cases he bought the stock on “puts” which means he collected a premium for taking on the obligation to buy the stock at a certain price. In these cases he technically paid less than the price reported because that does not reflect the discount for the premium.

With recent purchases its obvious he thinks its a good deal in the low 60’s and coincidentally it has also recently hit its 52 week low. But am I saying mimic what he does blindly? No.

The thing I like about this situation is that I can research BNI on my own, come up with my own valuation for the stock, my own opinion and then compare it to someone elses. This someone else just happens to be far more knowledgable then I am. I am not saying buy a stock just because Buffet buys it.

In alot of cases Buffet gets deals that we can’t. With GE and GS he got high interest perferred shares with lots of consequences in his favor. Those are unique and should not be read as “Buffet is buying GE stock!”. While he is technically buying GE stock he is getting alot more reward and protection than anyone buying their common stock. In this case he is buying BNI common stock without any special deals.

Risks and other thoughts

There are some things to take in consideration when looking at BNI from the perspective of a personal investor:

1. Buffett has to make large investments. There are great companies selling for great prices right now, alot that will probably make you more money than BNI but they are too small for large investors. This is where you have an advantage over Buffet. BNI is a good long term play but for someone who is not managing billions of dollars there are probably better oportunities.

2. Buyout. It is possible that Buffett is working his way to a complete purchase of BNI for Berkshire Hathaway. If this happens sooner rather than later you will not get the same return and if it were to happen within a year of your purchase date you could pay higher taxes on your gains. Keep in mind there has been no talk of a buyout, but I think its something to consider.

Personal thoughts

As I mentioned in a previous post, I look at investing as far more than a vehicle for income. I personally like BNI because I live in South Seattle close to alot of rail activity so I constantly get a personal real life view of my holdings and I derive much joy from that.

Warren Buffett MBA talk @ University of Florida

KC — Fri, 02 Jan 2009 03:08:15 +0000

I am unabashed fan of Warren Buffett and I really enjoyed watching this video of him speaking to a MBA class at University of Florida. Its a little over an hour but its time well spent.

The video is from 2000, but like all of his advice its timeless. One the things mentioned in the talk that really stuck out in my mind is the following in reference to the failure of Long Term Capital:

To make money they didnt have and didnt need they risked what they did have and what they did need.

He goes on to make an example with someone who has 100 million dollars. If this person can earn 10% a year on his 100 million dollars without leverage at almost no risk, or take some risk and leverage his 100 million dollars to make a 20% return this person would be crazy to risk losing their 100 million for an additional 10%. Especially because they already have 100 million bucks, how is the additional 10% going to make their life that much better? It isn’t it. But the downside if they loose is obvious, they no longer have any money.

The google video link above is for the whole 1 hour talk, its also on youtube broken up in smaller chunks.