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Insignia Systems: A Quality Stock For A Low Price

|About: Insignia Systems, Inc. (ISIG)
Summary

Applying the large cap method from the book "Quantitative Value" on all stocks reveals a cheap high quality nanocap: Insignia Systems.

The company guides for lower revenue in 2019 due to loss of key customers.

The company is trying to replace the revenue. At the same the company is trying to diversify its business by offering more different products.

Chances are very good the market overdoes with the low share price and the stock bounces back. Therefore I recommend a small position in this stock.

I systematically search for good quality stocks for a low price. I do this by ranking the stocks with the lowest EV/EBIT multiples on various multi-year quality metrics. I use a ranking algorithm similar to the one described in the book Quantitative Value. According to this book this approach delivers large returns for companies with market caps above $2 billion: 17-18% geometric returns per year.

For each statistical pick I do some research but not too much. I am afraid doing too much research leads to overconfidence and too much over-weighting. That increases my risks and could reduce my returns. I check numbers, look for governance issues, look into self-dealing behavior and check trust from outsider shareholders.

In the "All US-listed Stocks Universe" a stock with a good expected return according to this strategy is Insignia Systems (ISIG). This company provides in-store and digital marketing solutions in the US.

Most of its sales come from its Point-of-Purchase Services (POPS®) signage solution (79% of sales). This product navigates active shoppers to strategic parts of the store. According to the company this is "the only in-store signage solution available in the U.S. market that is able to present store-level pricing in conjunction with CPG and retailer brand messaging." "CPG" is an abbreviation for "consumer packaging goods".

The company tries to diversify with other products:

  1. corrugate displays, side caps and power panels that manufacturers can use for temporary promotions of their products in shops,
  2. solutions to promote individual products in shops including coupons, recipes and cross-promotions,
  3. mobile and programmatic advertising.

Insignia Systems is one of the 6% best quality stocks in my ranked low EV/EBIT + quality list. In particular the company is an excellent cash flow generator and has excellent 8-year geometric returns on capital and assets. Gross margin stability and growth are not good.

See this overview of the basic numbers for Insignia Systems using the data from my screener (based on the Reuters/Thomson database). Amounts in millions of dollars.

Ticker,

Fin Strength

Share Price

5-year low

Market cap

Enterprise Value

EV/EBIT

EV/Revenue

P/Tan B

P/Retained Earnings

NCAV / Market cap

US:ISIG

8

1.36

1.01

16.3

6.1

3.3

0.18

1.0

21

0.74

Date EBIT and

cash flows

EBIT

Cash flow

from ops

Free cash

flow

P/FCF

Yield

%

2018-12-31

1.8

7.1

5.8

2.8

-

The Financial Strength score is an improved version of the Piotroski score. It ranges from 0 to 10, so a value of 8 for Insignia Systems is quite good.

A search on the company name and keyword “fraud” revealed 2 relevant links. It seems the company started 2 lawsuits without merit. See this webpage from 2008 and this document from 2010. I think another law suit was started for good reasons. See the settlement from 2006. I do not think investors should be concerned about these finds since these things happened already a very long time ago.

According to the cash flow statements in my screener the company did big buy backs in 2011, 2013, 2014 and 2015. The company paid huge dividends in 2011 and in the first quarter of 2017. On May 15, 2017 and 2018 the company paid out $14k. So the yield is about 1%, but my screener (based on the Reuters/Thomson database) does not show a dividend yield.

Since April 5, 2018 the company has a repurchase plan for at most $3 million. But so far the company does not purchase many shares: 45,000 shares in the third quarter of 2018 for $1.77 per share. In the fourth quarter the company bought back about 20,000 shares also for $1.77 per share. In total the company spend $298k on buybacks in 2018. At the same time the company issues restricted stock, although much less than it repurchases.

See the annual report over 2018. For 2019 the company expects much lower revenue going forward because of the loss of significant clients. The company even expects operating losses in the first half of 2019. See page 10 of the annual report.

The balance sheet is very strong with low leverage, lots of cash and no debts. Retained earnings are $760,000. Therefore the company trades at a very high multiple Market cap/Retained Earnings. However Market cap/8-years of retained earnings is about 1.3, which is quite good. The reason retained earnings are so low is probably because of losses or dividend payments from more than 8 years ago.

Substantial shareholders: Cable Car Capital 9.1% managed by Jacob Haft Ma-Weaver, Air T 29.4 % (but possibly 32%), Renaissance Technologies (index-type hedge fund) 6.99%. Air T has 2 non-executive directors in the board but not the chairman. Insiders do not have invested substantial amounts of money in shares of the company.

In the first half of 2018 Air T started a proxy fight demanding governance changes. In the end they signed a “Cooperation agreement” with the company. One of the proposals shareholders voted for was a proposal making it easier for AirT to acquire the company.

Apart from the cooperating agreement there were no related-party transactions.

I consider the CEO very well paid with a package of over 500k USD. The company filed an S-8 for 1.2 million new shares to be used as employee incentive. See also the amendment.

Conclusion

The low EV/EBIT multiple is caused by fears of operating losses from much lower revenue in 2019, as the company guided. On the other hand chances are good the company replaces lost revenue later this year. For example the company seems to have some success in diversifying its business. Also, the company of this small size may be just a victim of the law of small numbers. Do not expect to see nice constant revenue at a small company with few customers. No, for such a company revenue can be lumpy, offering sometimes an opportunity for investors.

Note that the company has bought back shares in the fourth quarter of 2018 despite having issued negative guidance after the third quarter. These shares were bought back at higher prices than today. I expect these buybacks to continue. Therefore I recommend a small position in this company for good chances on high returns.

Become a statistical investor. Investing is mostly a game of luck. Therefore it is dangerous to invest based on conviction with large positions. But investing with many small positions in undervalued stocks with statistically great returns works just as well. So that is what I do, with 7 proven global stock strategies.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.