‘Call’ up this One

10/27/2006 12:00 am EST


Ken Kam

CEO, Marketocracy, Inc.

Ken Kam 's newsletter recommendations are fueled by the input of the members of his Marketocracy business - an elite group of investment veterans intimately acquainted with the stocks and their industries. Here is their latest update on a favorite stock.

"Last month, investors overreacted to news that Infosonics'(IFON NASDAQ GM) Q2 net income fell from $0.04 per share a year ago to $0.01, dropping its stock 29% in after hours trading to $6.04, then another 17% to $5.01, a few days later.

"A closer read of IFON's earnings announcement made it clear that the company actually earned $0.08 per share (non-GAAP) with the adjustment to $0.01 (GAAP) due to a new accounting method required this year to incorporate non-cash stock option expenses and for a reclassification of warrant in Q1.

"There are three issues for companies that use stock options as a significant part of their employee compensation: 1) Comparing financials from one period to another is like comparing apples (earnings WITHOUT options expenses) to oranges (earnings WITH options expenses), so it is easy to become confused or misled by the current earnings announcements; 2) Because each company has different stock option situations and handles the accounting differently, it is difficult to make comparisons between companies; and 3) Many investors felt burned by the tech bust a few years ago. Combined with the stock option pricing scandals hitting the front pages, and the negative "looking" financials, it doesn't take much to spook investors who have lost trust in technology related companies.

"Consequently, even though technology companies have grown earnings more than any other sector-including energy and materials, since 2002-their stock prices have lagged. That fear is providing good investment opportunities, and Infosonics is one of them.

"Reading the non-GAAP financials convinces us that in spite of the misleading headlines, IFON has continued to grow. This is an attractive business. Competitors Brightstar and Brightpoint, with revenue in excess of $2 billion/year, continue to expand. A third, Cell Star, is struggling, with revenues of $921 Million.

"IFON is focused on Latin America, the fastest growing mobile phone market in the world. The region's GSM networks fit IFON's business strategy and processes better, and there is room for the company to grow market share. Three multinational operators, America Movil, Telefonica Moviles, and Telecom Italia Mobile, dominate 77% of Latin America's mobile market. Struggling Cell Star is the only other competitor currently focused on Latin America, leaving prime market share for IFON to target.

"If Infosonics successfully expands its market share in Latin America, IFON will become much more than a double. That's why it is in our Best Ideas portfolio."

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