To OTC Journal Members: 
 

And Yes- There's Video

I have faith. I have faith that the market's aversion to equities is going to evolve back to normal throughout the remainder of this year, and valuations will become far more reasonable. Currently, the largest disconnect between corporate performance and stock prices I've ever seen exists in the US listed, China based companies.

Despite 30% plus growth rates, cash loaded balance sheets, and soaring profits, a great many China stocks are trading at Price to Earnings ratios of about 5. This, vs the S&P 500 trading at a PE ratio of 13- traditionally, growth stocks trade at much higher PEs than the S&P, so there's your significant disconnect.

There are reasons beyond irrational fear. China based companies are involved in a major land grab. They are all positioning for the consumer explosion coming over the next 20 years, and they all need capital to position themselves properly. Since the investment banking industry is very immature in China, and there's a backlog of 3 years to get through the regulatory process of going public in China, about 600 of these companies have turned to the US for capital, and they've been willing to take that capital at a low valuation- Hence, some excess supplies of shares.

Also, there's a certain level of mistrust associated with China based stocks. For some reason, US investors believe the China based companies have a high probability of delivering fraudulent numbers. While there have been of few instances of fraud, it's no more prevalent than in US listed companies, and the auditors have made significant progress on the process of auditing China based companies, and presenting their corporate performance in both GAAP and Non- GAAP formats. 

The most telling disconnect is going on in the Hong Kong market. China based companies who choose to obtain financing and go public on the Hong Kong market are receiving far better treatment. Their valuations and liquidity are far better than on the NYSE, NASDAQ, or AMEX. China companies are starting to recognize this, and more great companies are looking to Hong Kong for capital and listings.

If our markets don't start treating these stocks better, we will eventually lose all the listings and all the businesses in the greatest growth engine in the history of the world. Consider Hong Kong is much closer to China, and they understand the culture and growth better than we do. They are willing to pay 10 to 20 times earnings for nearly the same businesses the US is only willing to pay 5 times at current prices.

These China based companies are paying for our excesses in the credit bubble and the near collapse of our banking system. In the end profits will win out. They always do. There's another bull wave coming for China based businesses between now and the end of the year, and I want you armed with the appropriate ideas. I'm looking at small cap companies with great profits- I'm looking for $2 to $3 stocks that could go to $10.

Tomorrow, you'll learn about the first in a new series. $50 million in annual sales- $10 million in pre tax operating profits- 23% plus growth- underfollowed, and super cheap. And, yes, there's a short video to help you understand their business. You can buy $.60 in EPS for $2.

Tomorrow- I'll release it post close. A 10 minute investment of your time might just be the best investment you could make. Last week's idea- TBT- up to $32 from $30 already,
 

LongWei Petroleum (AMEX: LPH): Pre Announces Year End Monster Numbers

It's a poster child for the disconnect. LongWei, which has a place on my top 10 list, pre announced fiscal year end numbers yesterday. 

This is a $2 stock on the AMEX, and should be $5. It's ridiculous. I see ownership of this stock a bit like owning the a big oil company in 1960- kind of like owning Mobil, Texaco, or Chevron when they owned gas station networks and large refineries and depots- and before they were into exploration and drilling.

LPH's fiscal year comes at the end of June, so their audited numbers are due out at the end of this month. Yesterday, LPH pre announced their year end numbers. In June alone, thanks to their new Guijao storage facility, the company delivered $39 million in revenues, up 130% over June of last year. Profits were up 138%.

The company pre announced $339.4 million in FY'10 revenues- up 72% over FY'09. Gross profits were disclosed at $68.5 million. Last quarter, LPH delivered $.14 in EPS on about $100 million in revs. Therefore, we can figure the company will deliver about $.475 in EPS for FY'10, and assume significant growth once again in FY'11.

The chart shows a great stock from May of '09 to March of '10. From there, it has simply traded sideways with a slight upside bias no matter how great the company's numbers are.

Think about it- you can pay about $2 for $.475 in EPS, 70% growth, and a very strong balance sheet. As of the March quarter, the company also had about $.75 per share in cash. Looks like about $1/2 billion in revenues next year.

It should be $5, and someday it will be.
 

Eagleford Energy (OTC BB: EFRDF) Research Report

My pre Labor Day idea is one of the only small start ups claiming a stake in the up and coming EagleFord Shale in the Austin/San Antonio area of Texaco. The company is a David in the land of Goliaths, and I suspect it will develop its property up to a certain point, then slew the giant by selling out to him somewhere down the road.

I got permission from Garwood Securities to put the report on our site. Garwood rates the stock a buy and forecasts $2.50 on the stock, up from the current $1.30 level.

I'll have more on this one later in the month. For those who want a look at the report- here you go. Simply Click Here.

Disclosure: I'm long LPH, EFRDF, and tomorrow's idea- with my own money.

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