Wednesday, May 9, 2012

InfoSonics: More Net-Net Asymmetry

InfoSonics has already shown up on this site on the Value In Action page, but its recent price action (as pointed out by a commenter on this post) demonstrates what it is we value investors love about stocks trading at discounts to their net current asset values.

InfoSonics had been losing money for a while, and likely for this reason it traded at a large discount to its net current assets. Following the Value In Action post mentioned above, the stock fell 25%, once again offering investors an entry point at a 40%+ discount to net current asset value. I was not fortunate enough to get back in at this point, but what happened next is still interesting as a sideline spectator.

The company turned profitable! InfoSonics reported earnings of $0.01 per share and an outlook that suggested further profits were on the way, which was enough to send the stock price surging some 70%!. This is the beauty of a stock with low expectations: downside risk is low (the stock was already trading at less than much further could it fall?), and upside potential is high (despite the huge price increase, the company still trades at just over book value!).

To some extent, the improvement in operations was foreseeable. InfoSonics has been operating a growing segment with higher margins and a declining segment with lower margins. As the higher gross margin segment has gained prominence relative to the money-losing segment, the company's earnings picture has continued to improve, and may yet continue to do so if management's comments are any indication.

Still, you never know in advance whether a company will do well. But when you put the odds in your favour by selecting investments where downside risk is low relative to upside returns, you give yourself a chance to generate excellent returns.

Disclosure: No position

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