(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
In a recent article ("Did BlackBerry Sell 9 Million Too Few Z10 Phones"), I quoted a prediction by International Data Corporation (IDC) that the mobile operating system developed by BlackBerry (NASDAQ:BBRY) would be in a distant fourth place in the battle for market share in 2017, behind mobile operating systems produced by Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT). There was some disagreement in the comments of that article about whether IDC's prediction would come to pass.
It's difficult to predict with certainty which mobile operating system or mobile device manufacturer will dominate the market several years from now, but one thing seems certain: the market for mobile phone/computing devices will continue to grow rapidly over that time frame. In this post, we'll look at a small company that's positioned to profit from the growth in mobile, regardless of which devices or operating systems dominate down the road. That company is Wireless Xcessories (OTCPK:WIRX), which designs, manufactures, and distributes accessories for mobile phones and tablets, including those manufactured by Apple, Nokia (NYSE:NOK), Samsung (OTC:SSNLF), BlackBerry, and other companies. Before we look at Wireless Xcessories, let's consider the size of the wave it's positioned to ride.
The Scope Of The Boom
According to this presentation by Benedict Evans of Enders Analysis (via Business Insider), by 2017, the number of smartphones and tablets combined will approach 4 billion. To get a sense of how rapidly the market for mobile devices is growing, consider the images below. The first is a chart from Evans's presentation showing the growth in smartphones and tablets from 2007 until this year:
The pair of photos below together offer a dramatic illustration of how camera-enabled mobile devices have become ubiquitous over the last several years. Both are photos of crowds at St. Peter's Square in Rome awaiting the election of a new pope. In the 2005 photo, you can see a couple of lighted mobile phones in the foreground; in the 2013 photo, you see a sea of smartphones.
The Case For Wireless Xcessories
Wireless Xcessories is a cash-rich, profitable nano cap positioned to grow along with the growth in the market for mobile devices. When I first wrote about the company in 2011 ("A Nano Cap Bargain In The Wireless Space"), I mentioned that it had lost money on its operations over the previous three quarters, a loss the company's management had attributed in part to its transition to new business software. I bought the stock then primarily because of its balance sheet: the company's working capital was larger than its market capitalization.
Judging by the company's 4th quarter and annual 2012 results released last month, Wireless Xcessories has swung its operating business to a profit while maintaining a strong balance sheet. Some key numbers from its results follow; for context, note that the company's market capitalization, as of last Friday, was approximately $9 million and its share price was $2.25:
- Sales: $12,462,110 in Q4, which represented a year-over-year increase of 94%. For the year, sales were $40,243,548, a year-over-year increase of 80%.
- Operating Earnings: $323,453 in Q4, compared to an operating loss of ($14,089) in Q4 of 2011. For the year, operating earnings were $806,095 versus a loss of ($163,657) in 2011.
- Net Income: $284,162 or $0.07 per share in Q4, compared to $135,848 or $0.03 per share in Q4 of 2011. For the year, net income was $584,044 or $0.15 per share in 2012, compared to $133,600 or $0.03 per share in 2011.
The most encouraging part of this report for me was the swing in operating earnings, suggesting that the company has found a way to grow its business by profitably selling its products (rather than discounting away its profit margins). The company's CEO, Steve Rade, noted in the release that the company's fourth quarter results were boosted by
[T]he increased sales volume of OtterBox, Incipio, and Trident phone cases, as well as the continued success of our proprietary line, Upwardly Mobile Accessories.
I happen to use an OtterBox case for my iPhone.
Valuation
Based on its closing price as of last Friday ($2.25) and its 2012 earnings, WIRX currently has a trailing Price/Earnings ratio of 15 and a Price/Sales ratio of 0.22. Bear in mind, though, that the company also had $8.1 million in net working capital as of the end of 2012; back that out and the company's operating business is selling for less than $1 million, based on its current market capitalization.
Possible Catalysts
WIRX has climbed nearly 90% since the company released its 2012 numbers late last month, but a few catalysts working in confluence could drive the stock significantly higher. Here are a few possible catalysts:
- A relisting of the company's shares. The company voluntarily deregistered its shares in 2008, primarily as a cost savings measure; in its most recent quarterly release, the company's CEO announced Wireless Xcessories would apply to the SEC in the second quarter to relist the company's shares.
- The initiation of any commentary/coverage of the company. Right now, there is a dearth of any sort of commentary about the stock. Searching Seeking Alpha just now, the only post I found on WIRX was the one I wrote in 2011; that was the case as well when I looked at the Investors Hub message board for the stock. That suggests to me that the stock's recent climb since its earnings may be mainly due to current shareholders accumulating more shares. The stock may have more room to run if new investors investigate it and find it a compelling value.
- A strong Q1. If the company's earnings strength continues into the first quarter of this year, it may encourage new investors to investigate the company and existing investors may be willing to pay a higher multiple for new shares.
Risk Factors
Because WIRX has an extremely small float, those considering investing should note that the stock has the potential to be very volatile. And although the volume has increased slightly recently, in the past the stock has been extremely illiquid. Of course, whenever you invest in stocks, you also have to be concerned about the business risks the companies face. That's true with nano caps as well, but you are also faced with some additional risks. One is that earnings for small companies can be lumpier than those for larger companies. Another is that share prices can languish at prices well below even book or even liquid asset value (as was the case with WIRX when I first wrote about it in 2011). This disconnect between price and value is far less common among larger stocks, where the market operates more efficiently.
Reining In The Risk Of Owning WIRX
Since it's impossible to hedge the stock-specific risk of owning WIRX, the best way to ameliorate that risk is via position sizing and diversification. If you consider buying shares, limit your position size to dollar amount you can afford to lose.
Diversification + Hedging Against Market Risk
Although diversification ameliorates stock-specific risk, it doesn't protect against market risk. An investor who holds a small position in WIRX as part of a well diversified portfolio of stocks could buy optimal puts* on the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), as a hedge against market risk. We laid out a step-by-step example of how to do this for a $500k tech stock portfolio with a different index-tracking ETF in this instablog post, but the same procedure applies with SPY as the proxy ETF for a well diversified stock portfolio. The screen capture below shows the updated optimal puts, as of Friday's close, to hedge a diversified $500k portfolio against a greater-than-20% market drop by December 20th.
As you can see at the bottom of the screen capture above, the cost of this protection, as a percentage of position value (really, as a percentage of portfolio value in this case, because SPY is being used as a proxy for a diversified stock portfolio here) was 0.91%. Note that when you enter a number of shares that includes an odd lot, as in the case above, the app will slightly over-hedge the remaining shares, if necessary, so that the total number of shares entered is protected against the threshold you specify.
*Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance PhD to sort through and analyze all of the available puts for your stocks and ETFs, scanning for the optimal ones.
**Optimal collars are the ones that will give you the level of protection you want at the lowest net cost, while not limiting your potential upside by more than you specify. The algorithm to scan for optimal collars was developed in conjunction with a post-doctoral fellow in the financial engineering department at Princeton University. The first two screen captures above come from the Portfolio Armor iOS app.
Disclosure: I am long OTCPK:WIRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have also purchased optimal puts on SPY as a hedge against market risk.
