Since starting this blog back in May, I’ve profiled a number of undervalued companies and have invested in quite a few.

However, several stocks remained on my watch list despite a detailed analysis and writeup, primary because I wasn’t able to purchase shares with enough margin of safety.

Here are updates on a few stocks that remain on my watchlist:

VIFL – Food Technology Inc.

I missed out on investing in VIFL back in August and the stock price has appreciated considerably despite no real news.

At the time, the stock wasn’t quite cheap enough to make an investment, especially since MDS Nordiron, the company’s largest shareholder, could continue liquidating its position at any time.

I didn’t see a near-term catalyst, but it looks like other investors jumped at the chance to pile into a unique business with a rock solid balance sheet.

The stock now trades higher than my estimate of intrinsic value, with third quarter earnings due out in the next week or so.

SIF – SIFCO Industries

I entitled the article on “SIFCO – A Contrarian Investment” as the business was struggling with depressed sales numbers due to weakness in its primary markets.

Barel Karsan, an investor and blogger that I admire, wrote a piece on SIFCO after my article was published entitled “Contraction Expansion.” Despite the current economic climate, management is spending almost $6m in capex (vs. a normal $2m) to expand the capabilities of the ACM group.

There is certainly risk to this strategy, as a prolonged recession could jeopardize the company if the business expansion doesn’t take off. However, if management is correct and the industry outlook is bright, SIFCO will be in an even better position to capture market share.

I think the company will probably suffer through another rough quarter of YoY comparables before it fully turns the corner, although the stock has been bid up significantly since my original article.

VII – Vicon Industries

VII’s stock has dropped almost 36% over the previous three years, as the industry is very cyclical. However, management compensation has fallen 54% in the same period, so management is not benefiting at the expense of shareholders.

Recently, Vicon announced the renewal of its employment agreement with the company’s CEO, Ken Darby, while also setting a performance based bonus plan.

The latest agreement sets Mr. Darby’s annual salary at $400k, the same as the last two years, with a bonus pool tied to hitting consolidated sales targets and performance metrics.

Aligning shareholder and management interests is definitely a positive sign for any micro cap stock.

JCTCF – Jewett-Cameron Trading Company

JCTCF is a closely held company that has flown under most investors radar – management has largely went about its business and shareholder communication has been lacking.

In the last year, the policy has changed, starting with the implementation of a share buyback program in May. The program was further extended until Jan 2011.

More importantly, the company reported outstanding fourth quarter and annual numbers, with net income jumping almost 25% for the year.

I listed the management team as a possible risk in my original article (saying they control the majority of the company and have not necessarily been forthcoming with shareholders).

However, it’s hard to argue with results: management has grown book value by over 20% per year for the past 15 years.

Conclusion

This across-the-board price appreciation was certainly helped by overall gains in the market. The S&P is up about 11% in the past three months. As they say, “a rising tide lifts all boats.”

While I missed out on investing in these securities, I think most of them are financially sound businesses and I will continue to monitor a drop in stock price or new catalysts that could be the basis for pulling the trigger.

Disclosure

No positions.

Food Technology Inc. (VIFL) is a tiny micro-cap stock with a market cap of only 5.6M, operating in a unique industry:

“The Company owns and operates an irradiation facility located in Mulberry, Florida that uses gamma radiation to provide contract sterilization services to the medical device, food and consumer goods industries.”

Irradiation is a process of subjecting food to a short burst of high-energy radiation to break down bacteria.

Company sales are broken into three categories – medical devices (72%), food (16%), and consumer goods (12%). According to SEC filings by MDS Nordion[1. VIFL’s main source for Cobalt-60 supplies],

“Approximately 40 per cent of single use medical devices produced worldwide are sterilized using gamma sterilization technologies. Sterilization of medical devices… is a relatively mature industry with 4%-7% annual market growth.”

However, the potential market and growth opportunities for food irradiation is another story…

Debate over Food Irradiation

I think most people would agree that sterilizing medical devices is a good practice but there has been a rather intense debate about the merits of food irradiation.

Many consumers are turned away at the idea of applying radiation to food, despite the fact that academic studies have shown radiation to be a very effective way to kill bacteria and reduce the risk of foodborne illnesses.

Critics argue that irradiated food tastes differently and results in the loss of vitamins. However, most of the worry seems to be around consumer perception and general lack of knowledge regarding the procedure.

Foodborne Illnesses and Irradiation

According to the Centers for Disease Control, “foodborne diseases cause approximately 76 million illnesses, 325,000 hospitalizations, and 5,000 deaths each year in the United States.” [2. The Basics on the Foodfight over Irradiation]

Food irradiation has the potential to reduce these outbreaks and has been approved for use by many organizations including the World Health Organization (WHO), United Nations Food and Agriculture Organization, the FDA, National Aeronautics and Space Administration (NASA) and the American Medical Association (AMA).

The technique has been improved by the FDA for meat products since 1997 – Omaha Steaks, the $320m direct-to-consumer meat distributor, is a big proponent of irradiation. More recently, irradiation use has expanded to include produce such as spinach and iceberg lettuce.

Foodborne illness has been a major news topic of late, as more than 380 million eggs have been recalled due to salmonella threats.

There is no doubt that there is big potential for VIFL if food irradiation goes mainstream.

MDS Nordiron Agreement

As the radioactive materials used in the company’s work are tightly regulated, VIFL signed an agreement to procure Cobalt-60 from a company called MDS Nordiron. As payment, VIFL entered into a convertible debt agreement that allowed MDS Nordiron, at its option, to convert the debt to shares of VIFL stock.

As a result of the convertible option, MDS Nordiron owns approx. 18.2% of the company. As of Dec 2009, the company paid off the debt in full.

Financials

VIFL has been profitable for the past five years, and has shown steady growth in revenues and operating profits.

Revenues have increased from $1.7m in 2005 to $2.5M in 2009. During the same time period, operating profits have risen from $0.2M to $0.6M.

Margins are outstanding. Both gross and operating margins have been on a steady upward trend since 2006, coming in at 79.7% and 27.7% respectively last year.

The latest quarterly report shows an even greater rise, with operating margins jumping to 35.5% for the first six months of 2010.

EPS numbers have been inconsistent, primarily due to variability in income tax carryforwards.

As of Dec 31 2009, the company had unused operating loss carry forwards available of $4,931,966. These benefits can be an asset to the organization by reducing its overall tax burden. However, NOLs can cause variability in net income and EPS numbers due to the timing of the deferred tax assets

The balance sheet is rock solid. The company now has zero debt, with a quick and current ratio of 18.4 and 23.1 respectively.

Risks

MDS Nordiron has been selling off shares on a consistent basis, reducing the stake in VIFL from 23.5% in 2008 to 18.2% in 2009. MDS Nordiron sold off even more shares in June at around $2.05.

It is hard to determine MDS Nordiron’s motives regarding their ownership stake in the company but there is no doubt that consistent selling will put downward pressure on the stock price.

The other big risk for the company is customer concentration. In 2009, three customers accounted for 62% of revenue. If any of these customers were lost, it would substantially impact the business.

With that being said, the company managed to navigate the loss of a major client in 2009 who had accounted for 25% of total sales. Management was able to replace the lost business and report a slight revenue increase during the year, a major accomplishment.

Valuation

Capital expenditures were down significantly in 2009, as historically a major portion of capex expense was the purchase if Cobalt-60 supplies. VIFL has stockpiled approx. 1M curies of Cobalt 60, sufficient for the next 4-5 years at current production volumes.

Conclusion

VIFL’s fundamentals are very solid, but the stock is missing a catalyst to push the stock price substantially higher.

Continued pressure from health organizations or consumer awareness regarding the benefits of food irradiation could lead to a steady rise in revenues and profits.

Alternatively, a governmental mandate or incentives (stemming from an increased outbreak of illnesses perhaps?) might provide the nudge to food producers to aggressively switch over to irradiated foods.

Either option could increase the need for the company’s products in a big way.

I’ll be keeping a close eye on industry news, as well as watching VIFL’s stock price for an opportunity to pick up shares at a greater margin of safety.

But what do you think?  Is the stock cheap enough at current prices?

Disclosure

No position

Notes