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SMDM: A Profitable Micro-cap Growing Revenues While Trading At Just 5 Times Trailing Earnings And 30% Of Trailing Revenue

|Includes: BBY, The Singing Machine Company, Inc. (SMDM)

OTCQX:SMDM is a micro-cap that has a small float and low-daily volume with a wide spread between the bid and ask price, so use caution when trading this stock. However, that does not take away from the fact that this company-and its stock-are a true hidden gem. Actually, the fact that this company is small and under the radar has allowed it to stay an inexpensive opportunity throughout this year, even as the 3Q headlines announced revenues popped 90%, and its 10K announced annual earnings of $3.1mm profit, with net sales of $34.4mm, for FY13, while its entire market cap was just $7.1mm at the time of that announcement.

Looking at the top line, over the last 3 years, The Singing Machine's revenue has increased from $19.2mm in FY11 to $25.9mm in FY12 to $34.4mm in FY13. Therefore, the company's stock is trading at just 30% of last year's revenues.

The Singing Machine just posted earnings of $324K, which is one-cent profit. That is down from last year's four cents on $1.435mm in profit. Net sales for the quarter ended September 30, 2013 decreased to $10,834,570 from $14,376,086, a decrease of $3,541,516 as compared to the same period ended September 30, 2012. That decrease in profit and sales has sunk the stock almost 30% since the announcement. A few weeks ago, shares were trading in the 30-35 cent per share range, now they have dived back down to 20 cents per share. The most recent closing price of 20 cents is quite oversold territory for this stock, especially when you consider that this company has earned 10 cents profit over the last 5 quarters and a cumulative 12 cents profit over the last 9 quarters.

The stock, currently trading at 20 cents per share, is only trading at 4 times trailing revenues even with this earnings miss included. Most importantly, the CEO said along with this earnings release that much of the business that would have come in Q2 will be carried over to Q3. The CEO, Gary Atkinson, stated "We anticipate these shipments to be rescheduled to the 3rd quarter, but as a result we lost a lot of top-line revenue which we traditionally report in the 2nd quarter." Likewise, the new product that they have on sale at Best Buy's (NYSE:BBY) website and are rolling out to Best Buys at various locations all over the country should add a huge pop to this tiny company's market cap.

A 100%, 200%, or even a 300% return is not out of the question here: If SMDM produces another year of 8 cents per share in profit, and a P/E ratio of 8-10 were applied, a stock price of 64 to 80 cents per share would be warranted, versus it's most recent closing price of 20 cents.

Disclosure: I am long OTCQX:SMDM.