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2019-11-11 22:01:15

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Stock discovery is an incredibly interesting aspect of wider stock portfolio construction. As there are thousands of publicly listed companies, finding new companies to invest in is both a complex and simple exercise. My initial investment in Innovative Food Holdings (OTCQB:IVFH) was preceded on the former. In many ways, this foreshadowed the performance of the stock and my relationship with IVFH in the year following my purchase of shares.

Data by YCharts

IVFH is an interconnected platform of specialty food companies that provides chefs and consumers direct access to the highest quality unique specialty food products across the U.S. I discovered the company by chance in the comment section of the finance-related YouTube video. If memory serves me well, it was described as an undervalued gem .

Some of my best investments to date have been discovered by chance. So I did not hesitate to conduct further due diligence, making the decision to buy shares some weeks after reading the comment that catalysed this all. My investment process is primarily based on the health of the company's cash flow. And thus, the interaction of cash flow with revenue, gross profit, and the company's overall market capitalization.

The trend for IVFH's revenue is positively upwards. Revenue of $13.90 million was up 16% from the previous year, while gross profit of $4.1 million was up 37%. These growth rates are quite material when considered within the capitulation of the company's trailing twelve month P/S ratio.

Data by YCharts

High revenue growth (double-digit) and healthy gross margins should at minimum support a PS ratio north of 1, thus the current PS ratio seems to be an affront to rationality. Further, as the driver of the company's growth has been its e-commerce division (including Mouth and iGourmet), I will expect this revenue growth to be supported for the foreseeable future. E-commerce saw growth of just over 29% to $1.8 million with active and unique e-commerce customers at 21,650, an increase of 17% from the same period last year.

Mouth.com

The company's cash from operations has been erratic with declines in three of the last five quarters. The last quarter saw OCF of $500,000, an improvement from the decline of $500,000 experienced in Q2 2018.

However, I expect future quarterly cash flows to increase on the back of gross profit margins stabilising around the 30% mark with the total operating expenses not being too volatile on a quarterly basis. The revenue ramp will thus feed into the company's cash flow bottom line.

This will be supported by a conservative balance sheet of cash and equivalents of $3.2 million as at the end of its last reported earnings result.

Data by YCharts

This was against total debt of $500,000. Hence, with net cash of $2.7 million and positive cash flow, the company is in a great position to quite literally build out from its rock bottom valuation.

IVFH currently has 33.95 million shares outstanding, placing the current market capitalization at $18.95 million and the forward P/S on 0.31 for the 2019FY. And while FCF has been erratic over the last few quarters, I expect it to rise to the $3 million range for the 2019FY. This would place forward P/FCF at 6.31, further falling to 5.05 in the 2020FY on the back of FCF rising to $3.75 million.

In light of these relatively low trading multiples, I will maintain my position in IVFH. The company occupies an attractive niche as it grows revenue at an attractive pace within the context of a conservative balance sheet. I have confidence that IVFH will be able to feed my portfolio with alpha.

Disclosure: I am/we are long IVFH. 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.


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