relm wireless (rwc)

IN THIS ISSUE:

STOCK FEATURES

RELM WIRELESS

BIDZ.COM

SOUNDBITE COMMUN

DESWELL INDS

LPSR STOCK LEDGER

TOP 40 STOCKS

There was once a time when it was commonplace to hear talk of distinctions

between “the stock market” and “the market for stocks.” This was another, catchier, way of distinguishing between an asset allocation decision (deciding to be in equities) and selection of individual stocks. Lately, though, such rhetoric has faded, or in some quarters, become subject to derision perhaps because people got tired of hearing “I know my performance was bad, but I couldn’t help it. After all, this hasn’t been a ‘stock-picker’s’ market.” Popular notions aside, however, it is important now that we recognize the importance of these issues. Too often in the recent past, we have, indeed, not had a stock picker’s market. Let’s start with the notion that the performance of every stock reflects some sort of combination of general market factors (systematic) and unique company-specific (unsystematic) factors. Market factors tend to be powerful. Even under normal conditions, they typically explain more than half of a stock’s performance. Lately, though, in some non-stockpicker’s markets (2008, significant portions of 2006-07, and much of 2011), market factors became much more prominent and at times, driving the importance of company-specific factors to near zero. These are the times when even the best models fail to work and investors feel that no matter what they do, it turns out badly. This was a big problem for us for much of last year, when the market became much more risk averse than usual and pretty much rejected our category of stocks without regard to company merit. The importance of company-specific low-priced stock factors weren’t reduced all the way to zero. But they were given much less weight than usual. We’ve had a double-barrel reversal of fortune since mid-December in that the market became more accepting of our low-priced niche and paid a bit more attention to company-specific factors although still not as much as in normal times. Note, though, that our segment of the market tends to much less “efficient” than most, meaning the chances are greater that individual situations will play out in

ways that are inconsistent with market factors and with relevant company factors. Also, our stocks tend to be more volatile than most, owing to the lesser degree of trading liquidity and the nature of the companies themselves (smaller, less diversified revenue streams and greater challenges in covering fixed costs leading to more volatile bottom-line trends). Generally, these are good traits. They’re important reasons why low-priced stock opportunities are as substantial as they are. But at times, they can work against us and really test our patience. Lately, though, we’ve been starting to see the benefits of patience through dry periods. In this issue, we’ll be seeing how the future came in with a bang to boost long-dormant shares of RELM Wireless (RWC) and The Goldfield Corp. (GV). We’ll see how we may be moving closer to similar situations with the likes of SoundBite Communications (SDBT), NAPCO Security Systems (NSSC) and Heely’s (HLYS). And we’ll get another reminder of how private buyers can also jump into help us take advantage of situations where market inefficiency gets excessive: See, e.g., recent buyout offers for stocks we’ve been continued to follow (via the monthly Supplementary reports) since having been featured in previous issues, such as Dreams Inc. (DRJ), Great Wolf Resorts (WOLF) and Southern Community Financial (SCMF). Situations such as these serve to remind us why it may pay to be patient with such newly-discussed situations as BIDZ.com (BIDZ) and Deswell Industries (DSWL). NOTE: You can follow me on Twitter. Search for @MHGerstein or go directly to http://twitter.com/#MHGerstein.● W W W . F O R B E S N E W S L E T T E R S . C O M

22 April 2012

Volume 22

reasonable, to assume, therefore, that making P-25 a reality would seem a long shot given that the FCC has not formally adopted the standard; it’s not as if Motorola has incentive to rush into the vanguard. But customers, for whom interoperability and the competition it fosters is desirable, may see things differently. And on 3/28, a big-gorilla customer, the U.S. Department of Homeland Security came down for P-25. It announced a $3 billion two-year Tactical Communications contract (to be followed by three one-year options) for procurement of P-25 compliant two-way radios and related equipment by all its agencies and several others such as Justice, State, Interior and the White House Communications Agency. RWC is one of three firms included among those that will get work under a portion of the contract designated for small businesses. It’s too early to quantify how much business RWC will get. But considering that RWC did only $24.1 million in revenues last year, and that it is one of the main proponents of the P-25 standard endorsed by Homeland Security, it’s easy to assume RWC will come away with enough to be very significant for a company its size, one which is debt free and whose stock, even after the surge, trades at just 0.90 times trailing 12 month sales (compared to P/S ratios of 1.62, 3.33, and 2.39 in 2006, 2007 and 2008). With P-25 now ensconced, commercially if not legally, and with the Homeland Security feather in its cap, RWC can compete for additional business in ways it never before could. RELM Wireless is a Buy. ●

Forbes Low Priced Stock Report

RELM WIRELESS (RWC)

We’ve seen dull companies before, which is OK. We’ve done well in this area, and monotony is cited favorably by no less than Peter Lynch as a desirable investment attribute. But RELM Wireless (RWC) raised the boredom bar when, in its latest 10-K, it articulated four reasons why its market, land mobile radios (LMR) is cold: it’s a mature industry, many customers are in mature industries, public sector customer are hampered by budgetary constraints, and there’s a shortage of available radio frequency spectrum. LMR is familiar to many as walkie-talkies or larger devices for use in vehicles. Compared to cellphones, LMR is characterized by higher frequency of use over much shorter durations (say, 30 seconds). They’re appealing for internal organizational communication in that there are no variable line charges. But boredom notwithstanding, the stock jumped 56% on 3/28/12, and has held onto its newly elevated trading range! Actually, boredom is in the eye of the beholder. As dull as RWC may have seemed to Wall Street, things have been jumping for a while inside the firm. Research & Development in the mid-2000s was about 10% of sales, but from 2008 through 2011, it came in at 23.6%, 25.5%, 37.4% and 18.2%. To get a sense of what insiders have been doing, let’s go back to the fourth reason for slow growth: shortage of radio spectrum, something to which the FCC responded by pushing LMR to digital technology. That, in and of itself, is not necessarily a big game changer. But the way some LMR manufacturers including RWC are implementing it, P-25, is looking like it will have a huge impact. P-25 is a standard developed among LMR manufacturers, including RWC, at the behest of the Association of Public safety Communications Officials key aspects of which are meeting the FCC spectrum mandate, doing so with maximum efficiency, promoting open architecture for LMR, and allowing for interoperability (communication between equipment from different manufacturers). In LMR, Motorola Solutions is the big gorilla; RWC and others are small fry. Hence P-25 could be huge in that its adoption would prevent Motorola from effective locking out small rivals. It seems

BIDZ.COM (BIDZ)

BIDZ.com (BIDZ) operates a web site that sells products, mainly jewelry, through on-line auctions. So right away we need to address the eBay (EBAY) issue. They aren’t necessarily competitors. The BIDZ business model differs in key respects and in fact, the sites can co-exist quite well: BIDZ acknowledges that a lot of its customers buy from it in order to re-sell on eBay. BIDZ also operates Buyz.com, a site that sells the same sort of products as can be found on its flagship site, but at fixed prices, thereby reaching buyers who are not fans of the auction process. The company also operates Modnique.com, an on-line seller of designer products, clothing and consumer goods. Before looking further at the business, there’s some other baggage we must address. For one thing, the company’s recent performance has not been good. Revenues, after growing from $65 million in 2004 to $207 million in 2008, shrank to $110 million, $105 million, and $86 million in 2009, 2010 and 2011. The economy definitely hurt: We’ve seen with Charles & Colvard (CTHR) how hard it has hit the highly-discretionary jewelry area. But the worst seems over and CTHR stabilized in 2011 and then turned up in the fourth quarter. BIDZ, on the other hand, is still falling. Litigation has occurred challenging BIDZ’s business practices (alleging unreliable controls to guard against shill bidding and inappropriate appraisal prices), but a settlement agreement has been reached and submitted to the court for approval; the SEC investigated as well and already announced the conclusion of its work and that it will take no action. Also, the stock’s NASDQ listing is on probation and it looks like it will take a reverse split, something BIDZ anticipates doing if need be, to maintain the listing. These latter issues don’t hit the company the way the economy does, but don’t underestimate the impact of the management distraction, which now appears to be fading away. As to the auction approach, many BIDZ items open with a $1 minimum and tend to be shorter in duration, often lasting just a few hours, providing for more immediate gratification than is often the case on eBay. Also, the BIDZ buyer is buying not from another site user but from BIDZ inventory

backed by BIDZ inspection as well as e-mail and telephone customer support. So unlike eBay, BIDZ is not part of the web 2.0 phenomenon (user-generated content or activity). It’s a regular merchant that chooses a different way to sell. As to merchandising, BIDZ focuses on closeouts, which is becoming an increasingly important issue for jewelry manufacturers. Their inventory management burdens are becoming increasingly complex, not just for the usual reasons (incorrect forecasts of demand, obsolescence due to changes in consumer taste) but due to such emerging factors as: demand by major retailers for just-in-time delivery, demand on the part of major retailers to be able to cancel orders even in the middle of a production run, and cancellations resulting from changes in retailer strategies. BIDZ can provide a single channel for a wide variety of close-outs with manufacturers being sure such merchandise will not be sold along-side of full-price wares. Closeouts are never great for manufacturers, but the BIDZ option will often be better than the expense of melt-down and re-purposing, as pursued today by many. Closeout is an important element of the BIDZ niche, and the 158% year-to-year fourth-quarter revenue gain at Modnique raises hope that BIDZ can bring this to designer wares beyond jewelry. With the investment case so dependent on the potential appeal of this retailing niche as opposed to demonstrated success, this is a risky situation. But the company is debt free and the stock, left for dead by the market, sells for just 0.10 times trailing 12 month depressed sales, versus a 2008 multiple of 1.08 times strong sales, suggesting BIDZ.com is a speculative Buy.●


SOUNDBITE COMMUNIC (SDBT)

SoundBite Communications (SDBT) was introduced in the Volume 19 Low-Priced Stock Ledger under the heading “Nouvelle Telemarketing.” The phase marketing implies proactive, outbound efforts, in contrast to the first generation of customer service which entailed simply waiting for customers to call in with questions or complaints. SDBT did not introduce proactivity. Many organizations have, by now, long become accustomed to calling customers and prospects, by dialing manually or via predictive dialers (automated systems that pass calls to live operators only after the other party gets on the phone). SDBT makes its mark through the way its software-as-a-service cloud-based system eliminates the need for expensive and cumbersome equipment on client premises, the variety of ways it enables clients to interact with customers and the way it broadens the nature of what can be achieved through customer communications. The core offering is SoundBite Engage, through which clients can create and manage “campaigns” (a series of communications directed at a group of customers for a particular period of time) over a variety of communication channels (calling, predictive dialing, voicemail, e-mail, text messaging, etc.) addressing such topics as marketing notifications involving loyalty programs, promotions, service activations, etc.; customer care matters such as delivery notifications, surveys and program enrollment; payment issues such as reminders, and self-service or expedited payments; or collections including settlement offers. Thanks to recent acquisitions, SDBT is broadening its efforts in the mobile arena, which seems likely to become vital in the future as more and more consumers use these devices (i.e. cell phones, tablets) as their primary platforms. Notice, though, that when it comes to communication channels, we touched on some sensitive areas, such as text messaging, which may entail receipt charges on the part of the user. Sometimes, such issues must be managed purely on the basis of professional courtesy. Other times, there are regulatory constraints. And either way, the boundaries of appropriate behavior are determined with reference to preferences that were established by the consumer, as to

communication methods they favor, those they’ll tolerate, and those they want to bar. This can be a lot to cope with. SDBT steps in through its SoundBite Insight platform, which not only helps clients detect and honor preferences, it also monitors and analyzes consumer behavior to predict which among acceptable communication channels is more likely to be productive (i.e. a client may accept e-mail and text messages, but respond only to text). Insight can also be used to match client events and consumer subscriptions; i.e. a consumer may subscribe to notifications of flight delays. The latter is an example of how such communications can be broader than simplistic sales pitches or efforts to dun for payment. One retailer used SDBT to send automated voice mails to 500,000 loyalty club members reminding them about unused credits and produced a 20% increase in redemptions with only 2% of the consumers opting out. But even within the much-hated collection arena, how you communicate can make a difference. A bank tested text messaging against voice messaging and found significantly better payment performance among the text recipients. Large clients tend to deal directly with SDBT, and the latter has been using resellers to reach smaller enterprises. Also, international sales, which were a trivial part of the business in 2010, accounted for about 10% of revenue in 2011 and growth outside the U.S. is expanding rapidly. SDBT, grew briskly before the financial crisis, and now looks poise to get going again. And the stock is very cheap when we consider that cash, net of debt, amounts to $1.68

per share. SoundBite Communications is a Buy.●


DESWELL INDUSTIRES (DSWL)

Shares of Deswell Industries (DSWL) have been hit by two concerns, one unwarranted and one likely to be transitory. The unwarranted issue is the company’s status as a Chinese firm, something that has engendered much aversion on the part of U.S. investors due to ethical concerns among some such companies. But DSWL is not among the mainland firms that came to the U.S. market via reverse takeover (RTO). It was founded in Hong Kong in 1987. It moved to Shenzhen in 1990 and reincorporated in the British Virgin Islands in 1993. All of this pre-dates the emergence of the often-feared mainland RTO companies. The transitory concern is the business cycle. The company provides plastic injection molding and circuit board assembly services on a contract basis for manufacturers who prefer to outsource such functions. (Plastic injection molding provides 55% to 60% of revenue; there’s also a metallic unit that’s very small). Such activities, and their merits (manufacturers avoid spending on non-core activities, can more precisely fine tune output based on need, location of manufacturing in low-labor cost areas, etc.), are not new and by now, investors should be familiar with the notion that this is an integral part of the manufacturing process for many consumer products, particularly consumer electronics. In China, where DSWL operates, many competitors are small in size. That gives DSWL something of an edge since, nowadays, manufacturers seem to be showing preference for working with larger contractors which they deem better able to address requirements relating to quality of work and speed of delivery. At this point, readers accustomed to seeing features like this might expect a discussion of how DSWL is also more sophisticated in capability than its rivals. While there’s no basis to suggest it lags (note the size advantage) it should be noted that there are several ways to affix electronic components to circuit boards and that DSWL does not use the soldering technique. This limits its ability to cope with extreme requirements regarding compactness. But not every manufacturer needs to go to the max: DSWL’s main technique, pin-through-hole, remains very widely used, especially for consumer products.

Customer concentration has been an issue here and in a negative way of late. There was no single dominant customer but there are several big ones and one of them very sharply reduced orders to DSWL because demand for the products it manufactured fell significantly as a result of the economic weakness that followed the financial crisis. (Don’t necessarily focus on the Chinese economy. Although DSWL works there, many of the products that use its components are ultimately sold elsewhere, particularly in the U.S.) We haven’t seen much upturn yet, and to add to DSWL’s woes, rising energy prices have been boosting the cost of plastic resins, a key raw material for the injection molding unit. There’s no doubt DSWL is getting hammered by the economy: trailing 12 month sales were $69 million, versus a $144 million 2008 peak. If the economy improves, as it eventually will, I expect, DSWL’s revenues could rise very rapidly, assuming the company can survive through the bad times. DSWL looks fine in this regard. One factor in situations like this is, obviously, cost cutting and DSWL has been doing that. Beyond that is the company’s cushion. It has no debt and cash and equivalents amounting to $2.55 per share. We have to understand that the fiscal year that ended 3/11 witnessed a moderate cash-burn ($0.20 per share), but cash from operations has been positive ($0.99 per share) in the 12 months ended 12/31/11. Although capital spending will eventually ramp up from its present lull, DSWL can well afford to buy back shares (which it’s doing) and pay a dividend (yield: 3.0%). Deswell Industries is a Buy. ●


the life of the project, expected to last through July, 2013. Other new projects brought the backlog to $77.8 million, versus just $12.2 million at the end of 2011, about $55 million of which is expected to be realized this year. That’s huge considering GV had $33 million in 2011 revenue. We’d hate to see the Texas effort be one and done, but it does seem reasonable to assume this early bonanza will be help establish GV’s credibility in its new market and spur more growth than we’d expect from economic recovery alone (which should spur utility construction activity).

2012: THE FUTURE IS NOW Goldfield is not by any means the only situation where the future finally seems to be arriving. Entertainment Gaming Asia (EGT), featured in Issue 11, had big plans for the future. Traditionally, the company made most of its money supplying slot machines and often managing the slot areas for casinos in Southeast Asia, mainly Cambodia and the Philippines. This is a nice source of recurring revenue. But to boost growth, EGT is looking to development of its own casinos under its Dreamworld brand. The company had been talking for a while about two projects; Pailin in Northwest Cambodia near the Thai border, and Kampot in Southern Cambodia near the busy Vietnam border checkpoint. But the projects seemed to drag as did the stock. Lately, however, both have been kicking into high gear: Pailin is nearly complete and grand opening has been set for May 9 and Kampot is aiming at a third quarter opening. With the prospect of new revenues nearing, and execution credibility gaining, the stock has started to move. We’re also starting to see the prospect of additional growth: On April 2, the company announced it would develop and operate a slot hall to add onto a now tables-only casino in Poipet Cambodia, near the Thai border. Heely’s (HLYS) is, at least so far, a fad gone stale. In 2006-07, when the company’s unique sneaker with skating-type wheels still seemed cool, annual revenues were $183 and $188 million, and the newly issued stock reached the mid-30s. In 2010, with the bloom long off that rose, revenues were $30 million and the stock, which we glanced at in Issue 3, is in our under-$3 universe. The good news is that management stayed debt free and is still holding a lot of the cash raised in the I.P.O. Today, cash per share is $2.12. Also, management has been realistic about the fad and has pursued new products in its now-more-broadly-defined wheeled sports activities market such as the Nano in-line foot board, a grind-and-roll product which includes a hard nylon arch plate that facilitates sliding (“grinding”) on rails, etc., and an introductory price-point product that competes in regions where intellectual property protection is weak. The lingering problem had been increasing distribution at a time when retailers have been reluctant to take on new inventory. But in the 12/31/11 quarter, retailer-friendly initiatives such as new point-of-sales materials enhanced distribution to the point where U.S. sales jumped 38%. HLYS isn’t where it needs to be. But that was a nice, fresh,


LOW-PRICED STOCK LEDGER After the late-2011/early-2012 rally in the market in general and low-priced stocks in particular, I expected a pause and we got one last month, with the Top 40 and Model Portfolio dropping 4.5% and 1.8% versus declines of 1.7% and 3.3% for the S&P 500 and Russell 2000. If I assume American Oriental Bioengineering (AOB), a troublesome company (see last month’s issue) whose stock is not presently trading drops to zero, the Top 40 performance would come in at minus 4.2% (AOB wasn’t in the Model Portfolio). That’s not good by any means but it’s not a catastrophe given small-cap conditions. And it confirms the benefits of diversification discussed in the Issue 21 Commentary. And speaking of diversification, given the risks inherent in the unfolding earnings season, which may in many cases not match the market’s generally bullish expectations, I prefer to spread my risk so instead of owning the Model Portfolio, the Top 15, I own the Top 40 (which I can feasibly do since I trade at through Folioinvesting.com). I also retain my 10% stake in the Direxion 3X Russell 2000 Bear ETF (TZA).

SLEEPERS JOLTING UPRIGHT When I first started working as an analyst, I and others groused about covering companies where “nothing ever happens.” But the absence of juicy write-up opportunities does not mean the absence of potential stock-market profits. A 4/16/12 Hot Line discussed the buyout deal for Dreams Inc. (DRJ), a company that did nothing for us but make money after it was introduced in Volume 11. And The Goldfield Corp. (GV), a utility-construction firm and real estate developer, slumbered quietly until 2/27/12, when it jumped 35% and then kept on rising. The real estate unit is dormant now, having finally sold out the existing project. It could re-start quickly when conditions warrant given lad inventory. But the big story is utility construction services. GV had previously announced efforts to expand beyond its Florida bailiwick into Texas, and on 2/27, it announced the new division was named prime contractor for a 110-mile transmission line project that will bring in $52 million over

“When I first started working as

an analyst, I and others groused

about covering companies where

“nothing ever happens.” But the

absence of juicy write-up

opportunities does not mean the

absence of potential stock-

market profits.” Potential case in

point: The Goldfield Corp. (GV).

security systems it sells aren’t impulse purchases (like the locks you can get at hardware stores). It takes time to educate dealers and for them to try the product. But this has been going well and one new offering, an all-in-one access-fire-burglary system for large commercial structures (NSSC traditionally focused on homes and smaller commercial buildings) is being well received. This could be huge given the potential for a large, by NSSC standards, recurring revenue stream without a proportionate increase in costs. Stay patient here. NSSC seems a candidate to do what we’ve seen here from GV, HLYS and EGT.

ANOTHER BANK TURNAROUND We’ve done well with low-priced banking turnaround plays, and Youngstown, Northeast-Ohio and Northwest- Pennsylvania based United Community Financial (UCFC) may be another such opportunity. The usual script is for the stock to rise as the market comes to appreciate the asset-quality improvements made since 2008 and continues to make going forward. But this bank still has much initial asset quality improvement work ahead of it. Job one, here, has been cleaning up basic operating practices per a regulatory Cease & Desist Order. The good news is that this has been accomplished and the bank is now working under a much less onerous Consent Order. The bad news is that issuing new equity is likely to be in the bank’s plan. But

we’re tuning in after the stock has already reacted to that. ●


“Now, after a long absence, JOEZ

returns to the Top 40 due not so

much to recovery in its traditional

core (wholesaling of premium

women’s jeans) but very strong

results elsewhere: men’s apparel,

the development of its own retail

chain and a good start for the new

Else private-label women’s jeans

produced for Macy’s.”

start and with the cash enhancing the value angle, we can wait patiently for more.

STRIKE 1. STRIKE 2? Have you ever heard the refrain: Burn me once, shame on you, burn me twice, shame on me? We have two situations that will put this to the test. Joe’s Jeans (JOEZ), famous for high-fashion premium women’s jeans, was featured way back in Volume 1 but it faltered as the company’s flagship product line wobbled. This is an ever-present risk in apparel and apparel retailing (even the best merchandisers miss the boat every now and then) and I’ve often done well patiently tolerating periodic downturns. But I bailed here, despite adequate performance in other lines, because the women’s wear miss here seemed big enough to make me wonder about whether the company had really lost its core area. Now, after a long absence, JOEZ returns to the Top 40 due not so much to recovery in its traditional core (wholesaling of premium women’s jeans) but very strong results elsewhere: men’s apparel, the development of its own retail chain and a good start for the new Else private-label women’s jeans produced for Macy’s. I’m not ready to say JOEZ is what I originally thought it was (women’s wholesaling still needs improvement) but there seems to be enough momentum to make this look like a good short- to intermediate-term trade. So much the better if women’s wholesale gets back into gear. We got burned when EMC, the dominant customer for hardware plug-in appliances onto which programmers load code produced by Network Engines (NEI), initially featured in Issue 10, announced it would buy from multiple sources, not just NEI. But by Issue 19, the stock seemed to have adapted to the diminished EMC business and the addition of new customers, so I presented it again in the low-priced stock ledger. The stock did very well shortly thereafter, but came back down to square one after NEI announced that EMC would transition more product away starting in late 2012 or early 2013. In the 12/31/11 quarter, consistent only with the first announcement, sales to EMC dipped 17%, but overall sales slid only 2.7% thanks to NEI’s successful efforts to broaden its customer base. Round two will be a bigger challenge: the products EMC will later cease buying are likely to contribute about a third of sales in the 3/12 quarter. But we have been seeing progress in developing new customers, including NEI’s being named on 4/5 as a Dell Premier Partner, which should pave the way for more business there. And even if we eliminate one third of the trailing 12 month sales base, the stock’s price/sales ratio, 0.15, would rise to a still-very-low 0.23, suggesting the market may be fully discounting the EMC diminution.

UNLOCKING GROWTH POTENTIAL NAPCO Security systems (NSSC), introduced in Issue 13, has been a quiet holding. But the high-tech locks and

Forbes Low Priced Stock Report is published monthly by Forbes Inc. and Marc Gerstein Forbes Building, 60 Fifth Avenue, New York, NY 10011 VICE PRESIDENT/EDITOR: Matthew Schifrin EDITOR: Marc H. Gerstein EDITORIAL DIRECTOR: Tina Russo MARKETING DIRECTOR: Linda Bentley SUBSCRIPTION DIRECTOR: Andrew Marler DESIGNER: Gail Stoicheff For subscription information, call (877) 733-7836. Copyright 2012 by Forbes Inc.

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