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I think it's fair to say that Chinese oil consumption is only going to continue it's upward trend in the coming few years. China has already surpassed the United States in car sales as more people relocate from rural farming communities into the cities. Many industries are expanding, bringing in more workers willing to commute longer distances. All of which points to increasing oil consumption in China. The question is, what is the best way to play this ongoing trend? Many Chinese energy plays remain undervalued at this time despite recent gains, giving many options to play the trend. While not to everyone's taste, I personally like to focus on smallcap stocks that I believe are undervalued.
One company that has caught my eye in recent months is China Integrated Energy, Inc. (CBEH), formerly known as China Bio-Energy Holding Group. The company is engaged in three business segments, the development, production, and distribution of bio-diesel, the wholesale distribution and processing of heavy oil and finished oil products, and the sale of gasoline and diesel at retail gas stations. Actually, the bio-diesel segment really doesn't excite me especially. The main reason I like this company as an investment is the growing network of retail gas stations.
The company recently announced the purchase of 2 additional gas stations in Shaanxi province, bringing the total to twelve at this time. CBEH also plans to acquire a further 5-7 gas stations in the coming 12 months. The company has the ability to provide stable supply to all of the gas stations in its network. Being a vertically integrated energy company allows the company to achieve higher profit margins, and the simplicity of the company business model is something I find attractive as an investment. As of September 2009, the company reported average gross margins of 13.3% for its retail gas stations, a figure which I would anticipate growing significantly in 2010 with increased sales.
So how do the fundamentals stack up? The company has a market cap of $276M, with very little debt and a current ratio of almost 9. CBEH boasts a return on equity of almost 25% and a price to sales ratio of just 1.08. The company has demonstrated a trend of increasing sales and revenues over several years and has established a strong cash position in order to undertake further acquisitions. The shares currently trade at $8.49 and I would anticipate a 12-month target of $11-13.
Disclosure: At the time of writing the author held shares in China Integrated Energy, Inc. (CBEH).
In recent times there has been a lot of focus in looking at overseas markets for superior gains and as a hedge against the falling dollar. One country which has received a huge amount of attention and investment dollars is obviously China, however, it appears to me that finding value in China is getting increasingly more difficult. There has been somewhat of a herd mentality with many people rushing out to buy stock in Chinese companies, with little or no regard to whether or not it represents a good investment. Some people who would normally spend hours when researching a domestic company as a potential investment seem to throw caution to the wind when it comes to overseas investments. To some extent "a rising tide floats all boats", but there are excellent opportunities in China and there are, how do I put it, "less than stellar" opportunities in China. When the inevitable correction comes we will see which companies are the real deal and which are just playing with smoke and mirrors.
One company that I believe is the real deal and represents true value for the investor is Chemspec International, Ltd. (CPC).
Chemspec is a contract manufacturer of highly engineered specialty chemicals and the largest manufacturer of fluorinated specialty chemicals in China. The company is headquartered in Shanghai, with four additional facilities in surrounding provinces. The company’s chemicals are used as building blocks for more advanced chemicals or to enhance the performance of the end products of its clients. It sells primarily companies in the electronics, pharmaceutical and agrochemical sectors. Chemspec was founded in 1996 and underwent IPO in June of 2009, with a price of $9.
The area of contract manufacturing has grown immensely in recent years, both domestically and overseas, with many companies choosing to outsource what would have normally remained in-house. Chemspec's blue-chip end-users include major global TFT Liquid Crystal suppliers, one of the world's top global agrochemical companies and four of the world's top ten pharmaceutical companies by sales.
Chemspec trades at a P/E of 7.1 and a price/book of 1.51 with a current ratio of 2.99. The company has demonstrated excellent profitability in the past, however has been affected a little by the economic downturn, resulting in reduced earnings. The management appear to be making all the right moves to navigate through these difficult times, focusing on R&D and expanding facilities. The stock currently trades at $7.31, up significantly from the 52 week low, but still well below the IPO price. I would anticipate a 12-month target price of $9-10.
Disclosure: At the time of writing the author held shares in Chemspec International, Ltd. (CPC).
CryoLife, Inc. (CRY) is engaged in preserving and distributing human tissues for cardiac and vascular transplant applications and develops and commercializes medical devices. The human tissue distributed by the Company includes the CryoValve SG pulmonary human heart valve (CryoValve SG), processed using CryoLife's SynerGraft technology. The Company's medical devices include BioGlue Surgical Adhesive (BioGlue) and Hemostase, which the Company distributes for Medafor, Inc., as well as other medical devices. CryoLife distributes BioGlue, which is used in place of stitches, throughout the United States and in more than 70 other countries.
CryoLife is an interesting company that has been on my radar for a while now. The company has carved itself a nice niche in an almost recession proof sector and has been aggressively marketing its products. The market for BioGlue and tissue preservation services is only going to continue to grow as the population gets larger and older, and eventually the true value of the company will be recognized. My main concern is the wild rollercoaster ride that the stock price has been on over the years. That said, I do believe that the lawsuits are now behind them and that the company will continue to grow.
The company has been profitable since early 2007 and has been steadily increasing earnings and sales since then. CryoLife trades at a P/E of 5.0 and a price/book of 1.55 with a current ratio of 4.28. The company boasts a return on equity of 38.1% and a gross margin of 64.5% which is pretty impressive in the current economic climate. There was significant insider selling last fall when the company was trading at over $12 a share, although CEO Steven Anderson still holds almost 7% of the company, which I take to be a positive sign.
CryoLife currently trades at $5.82 and I would be looking for a 12-month price target of $11-12.
Disclosure: At the time of writing the author did not hold shares in CryoLife Inc., (CRY).
SmartPros (SPRO) provides learning and training solutions for professional markets, including accounting/finance, legal, engineering, securities and insurance, as well as information technology professionals. The company also provides corporate governance, ethics and compliance training for the general corporate market. It offers off-the-shelf courses and produce custom-designed programs with delivery methods suited to the specific needs of its clients. Its customers include professional firms and companies of all sizes. The company's e-marketing and e-commerce business sells ads on its website and develops newsletters and marketing programs for clients.
Depending on which numbers you choose to believe, unemployment currently sits somewhere between 9% and 14%. In these uncertain times I believe that companies such as SmartPros should do well as unemployment figures soar. Those of us lucky enough to be employed will most likely be looking for ways in which to become more valuable to our employers in order to retain our positions, and those of us who have suffered the loss of their job will inevitably be looking for ways in which to stand out from the crowd in the competition for the limited openings available. This is where SmartPros comes into its own. The company offers courses in the very skills that many people will be looking to add to their resumes.
The company reported excellent figures for 2008 and I expect a similar trend to be observed in 2009. As of December 31, 2008, the company had approximately $6.63 million in cash and cash equivalents, $5.6 million in deferred revenue, stockholders' equity of $12.1 million, and no debt. SmartPros trades at a P/E of 8.1 and a price/book of 1.17 with a current ratio of 1.36 and a gross margin of 57.9%. Also, the acquisition of Loscalzo last year appears to have been a smart one, leading to a number of cost cutting measures and an increase in ROIC.In the company annual report Chairman and CEO, Allen Greene stated “We are proud to have finished the year strong and are looking to carry that momentum into 2009.” “We continue to show revenue growth year-over-year and our operating profits were at an all-time high. Further, we believe that operating profit and EBITDA numbers provide the best comparative narration because it removes the influence of interest rates and the tax benefit treatment.” Greene holds almost 5.6% of the company stock and is one of several insider holders. Also of note, real estate investor Zohar Ben-Dov announced a 10.5% stake in the company in March this year.The company boasts a large course library and a large customer base, however, it is a competitive industry with a relatively low barrier to entry, meaning that the company has to continually strive to protect its niche. This being said, I believe that SmartPros represents good value at its current price of $3 a share and would be looking at a 12-month target price of around $5.Disclosure: At the time of writing the author did not hold shares in SmartPros Ltd (SPRO).
If you are anything like me, you've probably spent many hours screening through list after list of stock tickers trying to unearth some as yet undiscovered companies that, just maybe, might turn out to be the next Google (GOOG), Microsoft (MSFT) or Walmart (WMT). This inevitably results in a collection of speculative smallcap and microcap stocks that you have never heard of before - after all, you're unlikely to find potential multibaggers among the highly researched megacap companies of the Dow Jones - companies that have already grown massively.
There are a number of things that must be considered when looking to invest in these smaller companies, not least of which is that there is often a lot less information available upon which to base your decisions, not to mention volatility and liquidity issues. So where is a good place to start? I personally like to begin my search by looking for value stocks with little or no debt that operate in niche markets. I also like to look for companies with good cash flow, high insider ownership, and a history of growth. It is a common misconception that most smaller companies will inevitably end up beginning run out of business by a larger one. In fact, many large companies are so slow moving that the smaller company eventually catches or even surpasses them! For instance, there was a time when the majority of people believed that Microsoft (MSFT) was invincible, until little Apple (AAPL) turned the tables and became a multi billion dollar enterprise.So here are a three companies that I believe are worth considering further, along with a basic overview of each.
Image Sensing Systems, Inc. (ISNS)Market Cap: $35.6MThe company develops and markets video image processing products for use in traffic applications, such as intersection control, highway, bridge and tunnel traffic management and traffic data collection. Its family of products, marketed as Autoscope and RTMS, provides end users with the tools needed to optimize traffic flow, enhance driver safety, regulate air quality and address security/surveillance concerns. Image Sensing Systems trades at a P/E of 8.6 and a price/book of 1.25 with a current ratio of 8.96. The company has been steadily increasing earnings and sales, and boasts a return on equity of 15.8%. The company has global exposure and wide potential with sales across North America as well as in Europe, Asia, and the Middle East. The stock currently trades at $8.92 and I would be looking for a 12-month price target of around $14-15.RF Industries, Ltd. (RFIL)Market Cap: $12.1MThe company is a provider of interconnect products and systems for radio frequency (RF) communications products and wireless digital transmission systems. Through six divisions the company supplies customers across a wide range of industries including aerospace, medicine, multi-media, and communications, as well as the military. RF Industries trades at a P/E of 9.4 and a price/book of 0.78 with a current ratio of 16.4. The company has demonstrated excellent profitability in the past, however has been affected by the economic downturn, resulting in reduced sales. As a result the company recently suspended its dividend payment in order to focus on product development and acquisitions. The company has a return on equity of 10.1% and the management appear to be making all the right moves to navigate through these difficult times. The stock currently trades at $3.95 and I would be looking for a 12-month price target of around $6-7.Continucare Corporation (CNU)
Market Cap: $142.5M
Continucare is a provider of primary care physician services in Florida. The company through its network of 18 medical centers provides primary care medical services on an outpatient basis. It also provides practice management services to independent physician affiliates (IPAs) at 25 medical offices. The company trades at a P/E of 11.3 and a price/book of 1.34 with a current ratio of 4.8. The company has demonstrated good EPS and sales growth in recent years and has a return on equity of 12.8% with very high insider ownership. The stock currently trades at $2.40 and I would be looking for a 12-month price target of around $3.50.Disclosure - At the time of writing the author did not hold shares in any of the companies mentioned in this article.
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