To OTC Journal Members: 

I've got lots or email questions on my view of the Biostar (OTC BB: BSPM) numbers from yesterday. It's going to take me a couple of days to churn through some issues to get a reasonable EPS forecast for next year based on their forecast. From that, I can derive a price projection. You'll probably see it on Tuesday. My initial reaction is that there's no reason this couldn't trade to $7 this year- likely in the 4th quarter.
 

You'll Make More Money By Investing at the Steepest Part of the Growth Curve

You want to make 20% to 30% on your invested capital in a year? Find the smaller China companies that have recently upgraded to NYSE listings. Want to make 300% to 600% on your money? Find China companies that are going to end up listing on the NYSE, but haven't made the jump yet.

Once a China based company navigates the tricky waters that lead from the OTC BB to the NYSE, the big money has already been made, and fund managers happy with 20% annual returns will be ecstatic to uncover these gems. 20% annually doesn't float my boat.

I'm referring specifically to two of my covered ideas- China Education Alliance (CEU), and Universal Travel (UTA). Both of these companies have a few things in common. They are both former Bulletin Board stocks that made it all the way from the BB to the hi brow New York Stock Exchange in the last year. They are both US listed companies who's business is in China. They are both profitable and have grown quite dramatically. Oh- and there's one more thing they have in common- both stocks have done nothing since getting their NYSE listings.

I believe there's a lot more money to be made in a couple of slightly more obscure ideas I'm covering- China Recycling (CREG), and Biostar Pharma (BSPM). These two are delivering accelerating corporate performance, and I believe have more upside today.

It's all in the numbers, as it always is.

Note how UTA grew 102% from '07 to '08, but only grew 48% from '08 to '09. CEU is a bit more consistent- having delivered 44.5% growth from '07-'08, and 48% from '08-'09.

How about the bottom line? UTA's profits grew 43.5% '07-'08, but then actually went down to -58% growth from '08 to '09. CEU, while not so drastic, also went from 265% profit growth from '07 to '08, to 50% profit growth from '08 to '09.

China Education and Universal Travel should trade at much higher valuations, but they simply aren't. Why? in my view it's due to several factors- mostly the slowing down of profit growth and the cyclical nature of growth spurts at this level.

Both companies engaged in financing activities in 2009, and both are loaded with cash and have recently done acquisitions which have high upfront costs, and take some time to assimilate into the corporate mix.

Therefore, as the higher expenses take their toll to the bottom line before the higher revenues can restore growth, the companies experience a cyclical slowing in the growth rate.

As far as Earnings Per Share- the number that shows what you really own, there's more to shore up this thesis. Look at the slowing of the rate in EPS growth. CEU goes from 185% growth from '07 to '08, and then dives to 57% growth '08-'09. A rather dramatic slowing of the rate.

UTA is even worse. The company delivered 34% EPS growth from '07-'8; then -59% (negative EPS growth) '08-'09. As the market is a forward looking mechanism, is it any wonder these stocks are trading poorly?

UTA has assimilated several acquisitions, and claims it will return to a growth rate of 55% on both top and bottom line in 2010. It that's true, the stock should start behaving better.

CEU states it will generate a more moderate 30% top line growth in '10- far below its former blistering pace of 45% to 48%.

China Education (CEU) and Universal Travel (UTA) are more moderate growth stories over the coming months and years. Obviously, had you bought them both on the Bulletin Board before anyone knew about these companies, you could have made scandalous returns of 500% to 600%. Now, as NYSE growth companies, investors need to modify their expectations to 20% to 30%.

So, let's look at two of my favorites - one that still trades on the BB, and the other just graduated to NASDAQ. While I believe there is a bit more risk in both of these ideas, I believe you also could make a lot more money in these ideas.

Here's two worth looking approaching to apex of the growth curve- China Recycling (CREG) on NASDAQ, and Biostar Pharma (BSPM), still on the bulletin board- both are stocks I believe we can make a lot more money in, but certainly with some additional risk.

Here's the numbers, and look how the growth rates for the two important metrics- profits and EPS, are accelerating.

Revenue growth at both companies is outstanding, but the rate has slowed a bit for BSPM (estimate). BSPM delivered 114% growth from '07 to '08, and 59% (est) from '08-'09. CREG stayed a bit more in line with 106% from '07-'08, and 99% from '08-'09.

Profits paint and entirely different picture, suggesting both companies are delivering better net margins as they both grow.

CREG had -114% profit growth from '07-'08, and then delivered a whopping 2861% profit growth from '08-'09. Is it any wonder we've doubled our money on that one in the last 60 days? This is an example of one we have witnessed and profited from.  As a BB stock I first recommended it on Oct 19 at $2.40. It's now on NASDAQ at $5, and has seen $6. That's 110% since Mid October.

Likewise for BSPM. 33% profit growth from '07-'08 vs my estimate of 170% profit growth from '08-'09- that's pretty impressive acceleration, and the kind of growth Wall Street just loves.

Now, let's look at the true measure of what you own- the Earnings Per Share. As a shareholder, it's your slice of the pie. Look at the acceleration here.

Starting with CREG- -170% from '07-'08, then 471% from '08 to '09. That's a very strong bottom line turnaround, and with their recurring revenue model is only going to get better.

Now, look at my estimate for BSPM- 15% EPS growth from '07-'08, but 135% EPS growth from '08-'09. It actually came in a little less than my forecast, but too late to change the bar chart- the theme is intact. That's a whopping number.

Wall Street loves acceleration. Putting the brakes on isn't going to get you the price appreciation you get with company's who's bottom line is going full throttle.

In 2010, CREG has doubled in price, and BSPM is up about 17% (as of this writing). UTA is down 3%, and CEU is down 15.5%.

What's this tell us? Once these companies have passed the steepest part of their earnings growth curve, they might be good enough for the New York Stock Exchange, but they are not good enough for my serious growth money.

Look for accelerating earnings growth rates to make the 200% to 600% returns. It's certainly a bit riskier, but can be really rewarding. If you're in early, you'll have already notched huge gains when the company rings the opening bell at the NYSE, and the mutual fund managers are ecstatic with 20% to 30% ROI.

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