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To
OTC Journal Members:
Well, May has turned out to be an
atrocious month for the bulls in the markets. All the major indexes were
down about 8%- the worst May since 1962. The 2010 gains have been given
back, and then some. The headline risk remains massive everyday between
the European "Austerity" programs and the free fall of the Euro, oil spilling
into the Gulf Of Mexico a mile below the surface, and North and South Korea
pointing guns at each other. It's been rough.
This environment is especially tough
on the high Beta stocks- my focus. Beta is a measure of volatility. A stock
with a Beta of 1 has the same volatility as the S&P 500. If the S&P
goes up 5%, it is likely to have moved 5% over the same time frame. A beta
measure of 5 would be 5 times the volatility of the big boys. Therefore,
if the S&P moves 5%, a stock with a Beta of 5 would likely move 25%.
My ideas are all high beta stocks that will go up considerably higher than
the large cap stocks when the market is strong, but get clobbered when
the market is weak.
China stocks out performed the market
by 30% in 2009, but have been decimated in 2010. The meteoric rise in real
estate values in China has the markets concerned about inflation, while
at the same time the Europe situation has investors concerned about a China
slow down.
The world can't decide. It sees the
Chinese economy standing half way in a freezer door in the Sahara desert.
Some believe their economy is too hot. Others said Europe will make it
too cold. No one believes it's just right. When in doubt turn to history.
The South American Debt Crises and the "Asian Contagion" both worked themselves
out. The Europe recession and the overheated Chinese real estate market
will both resolve with less damage than the market is pricing in right
now.
Somehow China managed to keep it's
economy growing at over 9% in 2008, the year of the US's worst recession
since the great depression. Somehow, China will muddle through a real estate
boom. The really smart guys say to stay away from the high end China real
estate developers, but focus on companies who are working on lower to middle
income housing.
If we don't learn from mistakes of
the past, we are doomed to repeat them. I have learned, from as recently
as March of '08, that when stocks get blown up and are super cheap, it's
time to take a hard look. When the CNBC rhetoric would have everyone believing
China is going to implode in a circular motion and disappear into the ground
like the house in the last scene of the movie Poltergeist, it's time to
buy. When retail investors are pulling their money out of funds, petrified
of the markets, that's the time to buy. Sounds like now.
Here's some thoughts I pulled out
of a couple of recent articles: Sadiq Currimbhoy, head of Merrill Lynch
Asia Pacific strategies, recently stated "We should start nibbling at
Chinese stocks", Given the concerns on growth and risk aversion in Europe,
China will end up pushing back tightening measures. There's a chance for
a bounce as things get oversold. Reported by Bloomberg on May 20th. Jing
Ulrich of JPMorgan Chase states "Chinas Shanghai Composite Index may rise
to 3,800 in the next 12 months, driven by strong earnings growth and
reasonable valuations," That's 35% above current levels. I don't want
you to think I take all my cues from JPMorgan or Merrill Lynch, but it's
worth noting the big boys are starting to believe the over reaction in
valuation is going to reverse course, and I don't want you to be left without
some really good, undervalued ideas in small cap stocks.
I've put together a list of 10 stocks.
These are all China based companies trading with US listings I believe
are absurdly undervalued and represent an opportunity to take advantage
of the recent blow offs in the markets. Perhaps you want to nibble. Perhaps
you want to be a shark and attack. Perhaps you think there will be
more blood before the patient can get healthy, and want to stay on the
sidelines.
When there's blood in the water,
the most efficient predators on Earth- the sharks, are circling. The list
below is easy prey for sharks looking for a meal of profits between now
and year's end.
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My Top 10 Undervalued China
Ideas |
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I've called all my contacts and reached
out to numerous resources in the China investing world. I'm not going to
miss the opportunity to go bargain hunting while the investment community
believes China is about to implode from high real estate prices. I believe
we have Post Traumatic Real Estate Bubble Syndrome. Even the slightest
hint of a bubble brings back memories of 2008 when our largest financial
institutions nearly collapsed.
A major real estate collapse in China
would not be good for consumers over there, but the circumstances aren't
even remotely close to the US in 2008. 40% of the property being bought
in China today is being paid for in cash. That's hardly leveraged. Property
prices have appreciated at an unreasonable clip, but leave it to the Chinese
Government to engineer a soft landing on this issue. Didn't China still
have 9% GDP growth in 2008 while the US economy was mired in a recession/near
depression state? If the high end real estate market collapses, there will
certainly be some NPLs (non performing loans around), but better a government
with $3 trillion in cash (China) vs a government with $30 trillion in debt
(US) will handle it. Look for the Government to tighten slightly and slow
things down a bit.
The growth over there is happening,
and no matter how many analysts that haven't been to China get on CNBC
and predict an implosion, there are still 1 billion people waiting in the
wings to be the next generation of consumers.
I would challenge you to simply
look at some of the numbers these companies are cranking out. There's no
way these stocks can stay this cheap.
We'll consider this portfolio of
10 ideas to take life on June 1 based on the closing prices of the stocks,
and see where we are at the end of 2010. I'll bet it will be enlightening
for all. In order to make this list, the stocks had to be trading at far
less than 10x 2010 EPS, have at least a 30% growth rate, and have a very
strong balance sheet.
On this list of 10 stocks, I believe
there are at least 3 or 4 that will double before the end of the year,
4 to 5 that will be up at least 50%, and one or two that will be down slightly.
Of course, this assumes the financial world will not come to an end, so
call me an optimist.
If you like to bottom fish for value
and growth, you might find this list useful. The first two are my top two
picks, but there's a good chance others might do even better than the top
two. After the first two, they are listeded in random order.
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China Media Express Holdings:
(AMEX: CCME)- Switches To NASDAQ Next Week |
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Recent price: $13.25
52 week range: $7.35 to $14.82
09 performance: $95.9 million
revs- $56.6 million net profits
Market Cap: $400 million
Q1 Financials: $44.5 million in
revs (137% growth from Q1 09), Net: $18.1 million after subtracting one
stupid GAAP non cash charge
2010 Estimated EPS: $1.75 to $2-
company expects to earn about $70 million with an estimated 36 million
shares I&O
Overview: In 2008 Vision Media
(VISN) was one of the hottest stocks around. It was $6 in March of 08,
and ran to $26 by the end of July. The company was deploying flat panel
displays all over China at high traffic points and making the screens available
to advertisers. The business model was flawed as the advertisers came to
understand people really didn't see the ads as they moved around rather
busily on their way to wherever they were going. CCME has taken a different
approach, and advertisers love it. There are 21,500 mass transit buses
in Chinas 5 most prosperous municipalities sporting CCMEs advertorial
flat panel displays. The audience is captive on the bus, and the advertising
is far more effective. If the company can deliver $2 in EPS this year,
I cant see the stock trading much under $25 to $30 as interest comes back
to China stocks. Amazingly, there is not one analyst covering the
stock yet, which is another reason to own it now.
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Longwei Petroleum: (OTC BB:
LPIH) |
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Recent Price: $2.15
52 Week Range: $.74 to $3.28
09 Revenues (FY June of 09)
$200 million- $22 million net profits
Market Cap: $194 million
Rev calendar Q1 10: $97 million
up from $50 million Q1 09 (94% growth).
Net profits over last 3 quarters-
their FY 10 (ends June): $30 million after you add back in another one
time, non cash, BS GAAP charge for derivative dividend. Will deliver
at least $.45 in EPS for FY10 in non GAAP numbers. Cash flow is excellent.
The company has publicly stated
it expects to deliver nearly $1/2 billion in revs in FY 11 (July 1), and
$73 million in net profits (non GAAP)- According to company, this equates
to $.71 in EPS.
Overview: Longwei is an oil and
gas operation. The company stores, transports, and sells finished petroleum
products. It purchases finished product from refineries and moves to its
large scale storage facilities. There's no reason why the company, based
on its track record, shouldn't be able to deliver $.71 in EPS non GAAP,
and I cant see this stock trading at less than $5 in any sort of rational
market.
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China Information Security:
(NASDAQ: CPBY) |
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Recent Price: $5.32
52 Week Range: $2.50 to $7.97
09 Financials: $100 million in
revs; $30 million net profits
Market Cap: $250 million
Financials Q1 10: $25.3 million
(68% higher than Q1 09)
EPS estimate for 2011: $.73 on
$142 million in revs (42% top line growth)
Overview: This Company provides
integrated solutions for information security. It sells computer hardware
and software. It has a first responder coordination platform. It sells
products and services to both the government and private enterprise. It
has an entire information platform for health care/hospital/patient information
as well. If you think the world is getting to be a safer place to live,
you don't want to own this stock. If you think $.73 in EPS should put a
company with a 40% plus growth rate over $7.50, there's 60% return from
current levels.
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China Integrated Energy:
(NASDAQ: CBEH) |
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Recent Price: $9.43
52 Week Range: $3.95 to $12.31
09 Financials: $290 million revs,
$38 million net profits (36% growth rate)
Market Cap: $314 million
Q1 10 financials: $110 in revs,
$11.4 million net profits (18% growth)
Consensus Estimate for 10: $411
million revs, $1.15 in EPS (41% growth yty)
Overview: CBEH is an integrated
energy company- they engage in wholesale distribution of oil products and
own retail gas stations as well. The company produces and sells Bio diesel
as well. No reason they can't deliver $1.15 in EPS this year, which would
put the price of the stock at no less than $12. Since they are in bio diesel,
the stock may command a higher multiple. Perhaps $15 is a good target for
this particular stock.
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China Cast: (NASDAQ: CAST) |
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Recent Price: $6.63
52 Week Range: $5.08 to $8.50
09 Financials: $50.7 million
revs; $13.5 million net profits (21% growth rate)
Q1 10 financials: $15.8 million
revs; $4.559 million net profits- $.10 in EPS (47% top line growth)
10 financial forecast: $78.5
million revs; EPS of $.42 (54% growth)
Overview: This is the one stock
I'm highlighting that doesn't trade at less than 10x 10 EPS. The EPS number
on this company is really skewed by the property they own. This is an education
company. CAST provides eLearning, vocational training, and multi media
education services. The company also owns a University, and the depreciation
of the physical property really skews their bottom line. However, real
estate is the one asset that is more likely to appreciate than depreciate,
so their real financial performance is a bit hidden. Education in all forms
is growing like crazy in China. Stock could see $10 over the remainder
of the year.
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China Education Alliance:
(NYSE: CEU) |
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Recent price: $4.37
52 Week Range: $3 to $7.50
09 Financials: $37 million; Net
Profits: $15.2 million (48% growth)
Q1 10 $8.2 million revs; $3.66
net- $.12 in EPS (only 5% growth)
2010 Financial Estimates: $.62
in EPS- on $58 million in revs (56% growth)
Market Cap: $140 million
Overview: CEU is another education
company. This company specializes in three areas: specialized training
for high school students to do well on standardized tests (like our SAT),
online vocational training, and class room vocational training for post
high school level. The stock is cheap because the company only delivered
5% top line growth in Q1. However, the CEO pledges the company will deliver
no less than 30% in 10 over 09. If he's right, the next 3 quarters have
to be over $40 million, and show very strong year over year comparisons.
This is credible as the company did this in 08 as well. Also, CEU has
over $2 per share in cash with no debt of any kind, so you are really only
paying $2.4 per share for the business. I could easily see this one trading
to $8 in the next China rally.
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SinoHub: (AMEX: SIHI) |
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Current Price: $2.74
52 Week Range: $2.05 to $5.70
09 Financials: $128.4 million
in revs; $12.4 million net profits- $.48 in EPS
Q1 10 financials: $38.6 million
(113.4% increase); $3.5 million net
Market Cap: $77 million
10 Estimated Financials: $180
million in revs (40% growth); $.56 in EPS
Overview: SIHI is an electronics
component sales and supply chain management company. Since SIHI sells
lots of stuff to exporting manufacturers, the market is pricing the stock
as if the European slow down is a death knell. Of course, it's ridiculously
overdone, and there's lots of evidence the US consumer is coming back.
Perhaps they wont grow as much as they thought, but there will still be
substantial growth, and I fully expect the company to come close to their
10 forecast. With EPS around $.56, there's no rational way on earth this
stock trades much below $5, and likely a lot more. Very cheap right now
thanks to Europe fears.
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Biostar Pharma (NASDAQ: BSPM) |
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Current Price: $3.41
52 Week Range: $1.75 to $5.50
09 Financials- $53.3 million
revs, $7.8 million net (non GAAP)
Q1 10 financials- $12.3 million;
net profits $2.26- $.09 in EPS
Market Cap: $85.1 million
2010 Forecast: $80 million revs,
$18 million net profits (likely about $.50 in EPS)
Overview: Biostar is a pharmaceutical
company engaged in prescription medicines, OTC therapies, and traditional
Chinese medicines. The company generates over 50% of its sales from one
blockbuster product- an OTC therapy for HepB- a big problem in China. They
have the only approved OTC treatment for HepB, and it is estimated 10%
of the Chinese population is infected. The other treatment is a very costly
prescription product. As the Chinese health care system grows, it will
be a big positive for BSPM. The stock is very cheap thanks to a bottom
line disappointment in Q1. The company spent a lot of marketing money in
Q1, but the CEO says it will pay off big time later in the year. If they
do deliver $.50, I don't see the stock trading less than $5.00 to $7.00
in a reasonable world.
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China Recycling Energy (NASDAQ:
CREG) |
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Recent Price: $3.57
52 Week range: $.50 to $6.40
09 Financial Performance: $44.23
million in revs; $9.7 million net (105% growth rate)
Q1 10 financial performance:
$10.1 million in revs; $2.1 million net- 134% top line growth
10 forecast: $70 million in revs;
$18 million net (about 100% growth of 09)
Market Cap: $126 million
Overview: CREG is an energy savings
company that operates with a unique business model. The use a BOT strategy
Build, Operate, Transfer. They install energy savings systems on factories.
The installations are financed by an off balance sheet owned entity. The
factory owners pay a monthly fee which is less than the energy savings,
and come out ahead. They generally pay monthly for 10 years plus.
The financial are a little complex to understand. Last year they called
the monthly payment rent, this year they are calling it Interest Income,
and therefore it's not included in the revenues, but it does come to the
company in cash every month with zero cost of goods once an installation
is complete. Filtering out all the quarter to quarter weird ways the accountants
categorize this stuff, the company should deliver $18 million net this
year- one analyst has them at $.27 in EPS, and a $6 price target. I believe
$6 is low thanks to the recurring nature of their revenue stream. The more
systems they install, the more Interest Income hits the bottom line for
10 years. At the end of the term, the system transfers ownership to the
factory owner. Hence the acronym BOT- Build, Operate, Transfer. With the
recurring revenues building, this one should trade at a higher multiple.
Slightly illiquid, so not for short term trading. Carlyle Group, the largest
private equity fund in the world, is a shareholder in this one, and I believe
has a seat on the board.
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NF Energy: (OTC BB: NFEC) |
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Recent Price: $3
52 Week range: $1.80 to $6
09 Financials: $20.3 million
revs; $4.776 net
Q1 10 $2.9 million revs; $370k
net - $.03 in EPS
10 forecast: $30 million in revs;
$6.3 net profits- likely about $.50 in EPS
Market Cap: Only $40 million
Overview: NF Energy is a pet favorite
of mine as I have personally been an investor in this one for nearly a
year now. The company is in the energy saving space, and is a jack of
all trades for their local government. However, they really specialize
in gigantic hydraulic systems for hydro electric projects. Their water
valves can run up to 20 feet in diameter, and they control the water flow
in a hydro power project to maximize the turbine yield. It's a very project
driven company, so quarter to quarter numbers can be herky jerky depending
on where they are in the delivery cycle. The year is going to be very back
end loaded. Q1 numbers were very light, and only represented 10% of the
revenues they expect to do. They still have 90% to go. The stock is pretty
illiquid, so this is another one you can't trade in and out of. The stock
should easily return to its high of $6 once we get past this big sell off
and we have a quarter or two more in the rearview mirror. The company is
getting some major international recognition for its flow control systems,
so I believe you'll see new contracts coming in from global customers.
Disclosure: I'm long CCME, LPIH,
CEU, BSPM, CREG, NFEC
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