Don’t Listen To The Meme-Stock Hype: Koss Corp (KOSS)
“Do you have more than 1k on [Robinhood]? If so, I recommend using the margin. “
– featured in The Wall Street Journal’s Robinhood, Three Friends and the Fortune That Got Away
As more and more investors willingly admit that they are betting on stocks, I feel compelled to offer an easy way to make more informed decisions and hopefully save a lot of money. Over the past few weeks, I’ve been giving investors research that shows when stock valuations even go crazy. See my previous reports on GameStop
Why Investors Need Independent Research
Wall Street is not on a mission to warn investors of the dangers of risky stocks because they make too much money from their trading volume and from underwriting debt and selling stocks.
Only independent firms are free to provide conflict-free research and navigate Wall Street conflicts and analyst bias. With new technology cutting through the deluge of data in financial deposits and overcoming Wall Street’s research flaws, self-directed investors are in a better position than ever to make informed decisions.
Misinformation + margin debt = red flag
Information gathered about stocks on forums like Reddit can make investors gamble by buying dangerous stocks and taking high levels of risk that they don’t fully understand. According to Figure 1, debit balances on margin accounts, or the amount owed by a client to a broker, climbed in 2020 and early 2021 to reach the highest levels in U.S. history. This increase in margin debt corresponds to the rise of retail traders entering the market. According to E * Trade, the number of new monthly retail accounts increased from ~ 43,000 in February 2020 to ~ 260,000 in March 2020.
Margin debt has a 93% correlation with the price of the S&P 500. Inexperienced traders, fueled by WallStreetBets, are taking increasing risks, especially if they rally to buy stocks even.
Figure 1: U.S. Margin Debt at Record High
Meme Stock # 4: Koss Corp: Danger Zone Above $ 3
KOSS is not worth owning for more than $ 3 / share, and even that price assumes the company is able to reverse years of declining revenue and grow at the growth rates of the company. industry. Nonetheless, the stock continued to climb to $ 64 / share before resuming a roller coaster ride to ~ $ 20 / share.
Figure 2: Basic research on when to sell KOSS
Shrinking as industry expands
The retail dollar value of global helmet shipments has increased by 35% (vs. -8% for KOSS), cumulative annually since 2016. In other words, Koss’s revenue has fallen by 30% while the retail dollar value of global helmet shipments increased 233% during the year. at the same time. Naturally, Koss’s market share has grown from 0.19% in 2016 to 0.04% in 2020. If Koss cannot increase his revenues in such a good environment, one has to ask, “When will it be?” -he?”
Figure 3: Koss and industry turnover 2016-2020
The fundamentals were only positive during the pandemic
Koss’s earnings have been deteriorating for many years, showing how little the stock’s recent rise is linked to fundamentals. With the exception of the TTM period, Koss return on invested capital (ROIC) and NOPAT margin have been negative every year since 2016. Although Koss fundamentals have improved slightly in a very favorable environment for headphones compared to at TTM, this improvement will last as the pandemic is eliminated. Figure 4 compares Koss’s fundamentals to its peers.
Figure 4: Profitability Measures: Express vs Peers: 2020
Weak fundamentals and declining market share, however, didn’t stop Koss’s stock from skyrocketing during the stock frenzy itself. To give an idea of how insane the stock was overvalued at its peak, I do the math and show how the company should behave to justify $ 64 / share.
$ 64 ‘Crazy’ Explained: Involves More Profit Than GoPro
My Reverse Discounted Cash Flow (DCF) model is a great research tool for analyzing the expectations implied by stock prices. To justify $ 64 / share, this shows that Koss must:
- immediately improve its profit margin to 6% (3x its highest margin ever recorded of 2% TTM against a 5-year average margin of -3%) and
- increase revenue by 31%, compounded annually through 2030 (nearly 3 times the expected industry growth through 2026, compared to Koss’s -6% CAGR over the past five years)
In this scenario, Koss achieves after-tax net operating profit (NOPAT) of $ 16.4 million in 2030, more than 43 times its NOPAT TTM, almost 5 times the 2020 NOPAT of speaker maker Sonos.
Figure 5: Historical NOPAT of Koss vs implicit NOPAT DCF: Scenario 1
Still crazy at ~ $ 20 / share
I’m running the same analysis to show what the company needs to do to justify the price at the time of writing:
- improve its profit margin to 4% (equal to Sonos ‘TTM margin versus Koss’ 2% TTM margin) and
- increase revenue by 22%, compounded annually through 2030 (which is twice the expected industry growth through 2026)
In this scenario, Koss earns over $ 5 million in NOPAT in 2030, or 147% of Sonos’ 2020 NOPAT and just 17% below GoPro’s 2020 NOPAT. See figure 6 for more details.
Figure 6: Historical NOPAT of Koss vs implicit NOPAT DCF: Scenario 2
Good reason for high short interest
As short interest in the stock recently recovered to the January levels (27%) that made it a target and precipitated the latest squeeze that pushed up the stock, another squeeze could be underway.
More reliable basic research on other Meme Stocks
With a better understanding of the fundamentals, investors know better when to buy and when to sell – and how much risk they are taking when they own a stock at certain levels.
I have already illustrated the extreme risks investors take when buying GameStop and AMC Entertainment, Express and Netflix. In the coming weeks, I will continue to perform this same analysis on other stocks of the same: Blackberry (BB), Genius Brands
I will also feature other meme stocks that trade at levels that are totally disconnected from fundamental reality, like Tesla
Figure 7: Memes stocks disconnected from fundamental reality
Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation for writing about a specific stock, style, or theme.