Insignia Says 'Buy Me'

 | Sep 11, 2013 | 4:00 PM EDT
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By default, my stock research has me looking at smaller and smaller companies these days. That approach is directly correlated to market performance. This multiyear bull market has more stocks trading at lofty levels as investors rush to pile into the most popular and most desirable names. But since a lot the "smart" money spends little to no time looking at sub-$100 million market-cap stocks, you can stumble across some interesting names solely due to their size.

One of these names is Insignia Systems (ISIG), which makes signs and labels for consumer products and retailers. When you see a "20% Off" sign on the clothing aisle or on a product label, Insignia may be the company that made it. The company has a $37 million market cap, and it recently experienced capital and administrative changes that indicate a bright future for this little gem.

Earlier this year, Insignia offered to buy up $12 million worth of its own shares at $2.15 apiece. It could do this because it sits on more than $22 million in cash with no debt. So what happened? Less than a million shares were tendered at a price of $2.35. In other words, very few people agreed to sell and, even then, the company had to increase the price. In the end, Insignia was only able to buy $2.2 million worth of its shares. So at today's market cap, ISIG still sits on $20 million in cash. Also, the company made executive changes, including a new CEO. The most recent quarter saw sales leap to $5.7 million from $4.3 million a year earlier. Net income for the second quarter ended June 30 was $164,000 compared with a loss of $500,000 in the year-ago period. Gross profit margins exceeded 40%.

Despite the threat of more shoppers buying online, store signage is perhaps the single-most important part of in-store marketing for retailers. While most retailers could make their own signs (and some do), having effective store signage and labels is such an important part of generating impulse buying that most retailers don't want to risk doing it themselves. The cost of signage and labels more than offsets itself for the potential benefit, so most retailers are happy to have a dedicated and professional company on it.

As it stands, one is paying less than $17 million for a business that does $20 million in sales, which are growing and command 40% gross margins. Two years ago, ISIG pulled in more than $6 million in profit. More important, the company was willing to invest more than half of its cash balance to buy back upwards of 30% of its outstanding stock -- a very strong endorsement that the new executive team finds the valuation compelling.

Today, shares trade for around $2.75, a price that I believe offers a favorable outcome for patient shareholders.

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