OTCJ: TPI- New China Idea; September in October

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September In October

It's finally here. All the clichés that apply. The Pause the Refreshes. One step back, two steps forward. The calm before the storm. The market correction all the gurus have been predicting for some time has manifest itself in this week's trading activity.

The excuse has been economic numbers. I can't wait to hear the media vomiting out the phrase "Double Dip Recession" as the Bears feed them all kinds of negative chum on the economy. Another wave of foreclosures. The coming purging of credit card debt. It's all going to pile in as the market pulls back. When you hear this stuff, think "opportunity".

I for one couldn't be happier to see the market give some ground. I have suspected for some time we needed a little bout of profit taking to let the sidelined investors come off the bench and get into the game. I sensed the market was tired as the volume in small stocks had dried up considerably without giving up much of their hard earned gains. After this correction runs its course, which I suspect will be quite short lived, the stocks that have done well since March will be the leaders in the next leg up.

If you're wondering about the pullback numbers, here's a completely indeciperhable chart. Lots of data in a small space. Since you really can't see it, I'll explain. A shallow pullback would imply a Fibonacci 38.2% retracement. There are two major levels to retrace from- the March low, and the July low.

The July pullback would take us to about 1,000 on the S&P 500. A retracement off the March lows, which would be far better for the markets, would take us to about 922 on the S&P 500.

The calendar seems to be skewed this year. September is happening in October. October has been the bear killer. It might be out to November this year, but a long term Bull is taking shape right now.

No Recession in China

Here's some key facts coming out of China of late. The September manufacturing index in China hit its highest level in 17 months. 

New York Times columnist Thomas L. Friedman points out 18 months ago the Chinese made a decision to commit considerable resources to "Going Green." He describes this as a second "Sputnik" moment for the US.

In 1957 the Soviet Union blind sided the US by putting  its Sputnik satellite into Earth orbit. Right in the midst of the Cold War, the Commies proved they were ahead of us, and might be able to attack from Outer Space. Coincidentally, 1957 was the year Senator Joseph McCarthy of Wisconsin died at the age of 48 after conducting his infamous hearings earlier in the decade.

The feat set off alarm bells in American political and education circles that led to a surge of interest in math and science — followed, ultimately, by the triumph of the space race, the landing of American astronauts on the moon in July 1969.

Friedman expects we are behind in the Green Revolution race, and suspects over the coming years cheap Chinese manufactured goods will be replaced by higher end electric cars, extended life batteries, and solar panels. 

On a separate issue: Talk about wealth creation in China. I read an recounting today related to the housing industry. Star River, a high end condo project in Shanghai recently started selling units. There were 320 units ranging from $1.5 million to $4 million in price. 98% of the units sold out in a few days. A few buyers bought multiple units, and the leverage ranged from 40% down to all cash. Sounds like a booming economy to me.

I've got a truly undervalued gem coming next week embroiled in the heart of China's green revolution, and making money hand over fist. Stand by for a new idea in pretty short order. 

In the meantime, here's an idea that I've been waiting to present. I've been waiting for a pullback in this awfully hot stock. The pullback has come, so now's the time to have a look:

Tianyin Pharmaceuticals (NYSE AMEX:TPI)

Tianyin Pharmaceutical is a stock I've been looking at for some time, and I've been waiting for some sort of market correction to bring it to your attention as it has made a strong move this year.

I believe this stock is significantly undervalued, and there's both growth and PE expansion opportunity to make money on this idea. This idea plays on the growing consumer class in China, and the recent infrastructure the company has added that should allow it to expand revenues by 140% over the next several years.

TPI is a manufacturer of traditional Chinese medicines. Sporting a current menu of 42 different items, TPI generated $43 million in revenues in FY '09 (june yr end). Numbers came out recently, and here's their track record over the past three years:

Fiscal Year (June)
Growth Rate
Profit Growth
Earnings Per Share
$20.4 million
$3.9 million
$33.5 million
$5.9 million
$43 million
$7.9 million
2010 (Projected)
$59 million (e)
$10.5 million (e)

Check out this table of their growth and profitability. Outstanding. Top line growth- bottom line growth- TPI has it all. In their 2009 fiscal year, their revenues were up 28%, their profits were up 34%, and the EPS came in a $.51.

There are 23.4 million shares I&O as of the last SEC filing. The fully diluted number is 24.8. As of Friday's close of $3.60, the market was valuing this company at a mere $84.24 million.

A traditional US valuation would have this company trading at about $5.75 (14xTY EPS). Therefore, the immediate upside from Friday's close just to get to a reasonable valuation is about 60%.

There are two reasons I like this stock right now. First, I believe the company's growth rate could accelerate considerably. On September 16th TPI announced it had received the final certification for its new manufacturing facility- a facility that will give the company the capacity to grow to $100 million in annual revenues.

Secondly, the stock has pulled back nicely, offering a nearly ideal entry level for new capital. Here's another complicated chart. I've drawn a lot of "stuff" in today's charts because we have to be thinking no only in terms of Fibonacci retracements from the July lows, but from the March lows as well.

This stock has a lot of what technicians call "fib nodes" in the $3 to $3.60 range. This stock has enjoyed a good year so far, coming off the absurdly oversold level of $1, and hitting a high of $4.40.

Friday's close of $3.60 should represent the first line of support. If it trades much lower, $3 could come into play, but more likely it's ready to rebound.

Therefore- here's my call- A partial position at $3.60 with an eye towards accumulating more if it trades much lower. SSL is $2.90- if it trades much below $3, it might be time to consider preservation of capital.

Short term target: $5.75- longer term (one to two years) $10. And- here's one more kicker in case this isn't good enough for you- TPI paid it's first dividend in July- a quarterly dividend of $.025- or $.10 annually. That's a 2.7% dividend based on Friday's close. 

Now, it might seem like no big deal to collect 2.7%, it sends some interesting signals. First, it tells shareholders the company wants to share it's profits directly with you, and secondly- it suggests the management believes they can continue on this strong growth path and still surrender some of its valuable cash.

All in all- good traditional medicine for your portfolio.

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