Twice In the Past Year
I’ve done this twice in the past year. Here’s how it works. I come across a situation in an absurdly underfollowed micro cap stock with great numbers and a really low valuation.
Because of my vast network of contacts, I know the company is going to begin an initiative to bring itself to the attention of hundreds of thousands of investors.
I know thinly traded stocks that have been totally ignored for long periods of time can trade up very rapidly. I believe this will be the next one.
A Story of a Home and aTrain
Have you ever heard the story about the house on Long Island no one could sell? It was listed for years, and the owners kept trying to hire a real estate agent who could find a buyer.
It seems a train passed behind the house twice a day, and it got loud for a couple of minutes each time the train went by.
Finally, the owner found an agent with a different approach. He cleared all the brush away from the back fence. When he brought potential buyers to the house, the first thing he did was take them to the backyard and show them the train tracks.
He then explained the train’s noise had driven the price of the home down 10% as compared to other like homes in the area, so if you didn’t mind the noise twice a day, you were getting a bargain.
The house sold in a wee, and the new owners were very happy with the bargain they got.
Here’s the point- Let’s clear away the brush on China Shandong Industries, and find out why it’s such a bargain.
China Shandong (OTC BB: CSNH): As Cheap As It Gets
In my 23 years of investing in small cap stocks, I’m still amazed when I come across a bargain like this.
So, let’s move away the brush and find out why this stock is so cheap. For starters, no one knows about it. The company has never made any effort to reach investors, and it’s been quietly chugging along, growing at a significant pace and making gobs of money.
Secondly, it’s in a boring industry- the company makes furniture. So, let me ask you this- do you find anything boring about these annualized numbers based on the six months ended June 30th?
- $134 Million in Annual Revenues
- 70% top line growth
- 27% gross margins
- $22 Million in net income
- $.50 in Earnings Per Share
- Total Assets of $76.5 million vs Liabilities of $13.4 million
Wall Street tends to overlook companies in industries that don’t have the hot story de jour. Smart investors do not.
Consider the price performance of furniture maker Lazy Boy (LZB) coming out of the 2008 recession.
In early 2009, rather boring furniture maker LZB actually traded below $1 per share, and Wall Street couldn’t have cared less about their story.
If you had the courage and common sense to invest in this one when no one was watching, you netted 1400% on your money in about six months.
It’s also worth noting- in 2009, when this stock made a 1400% move, the company delivered $1.226 billion in revenues and $122 million in net losses. LZB turned around and made $32 million in 2010- but the real money in the stock was made 6 months earlier in 2009.
There’s nothing boring about a 1400% return on your invested capital.
China Shandong (CSNH): Located in the Sweet Spot
As you can see from the map, CSNH is located on the North Eastern coast of China. The company is right on the border of the Shandong and Anhui Provinces. The region is very rich in wood with large quantities of poplar and paulownia easily available.
From this manufacturing base, CSNH produces over 20,000 different products. Their handcrafted straw and wicker accessories you see pictured below are made in their employee’s homes, while the larger items require hi tech manufacturing, and are mass produced at the 1.2 million square feet of manufacturing.
Their products are carried in stores all over the world including the US, Denmark, Germany, the UK, Spain, Italy, Sweden, Canada, and Taiwan.
IKEA is one of their largest customers along with Restoration Hardware and PotteryBarn. So, next time your wife brings home that 6 bottle wicker wine carrier you see pictured above, it’s likely it was manuctured by CSNH.
CSNH: Ready For The Attention
As I said in the intro, this is my 3rd Special Situation idea in the past year. When I find these, I’m nearly always right.
Last October I found China Electronic Holdings (CEHD) on October 1 at $3.47. The sell recommendation came on December 7 at $6- 73% in 5 weeks. It’s in the archives at EmergingChinaStocks.com. Another boring story- a chain of rural appliance stores. We just made money.
My next Special Situation was China Modern Ag (CMCI). This one only took 4 days before I recommended the sell. It was $1.10 on May 28th, and hit its all time high of $1.60 in early June for a 45% gain in a few days. This boring dairy producer just made us money.
Over the next several weeks, CSNH will reach out to hundreds of thousands of investors for the first time to tell its story, and as blown out and thinly traded as this stock is, I expect it will trade up rather rapidly.
As you can see from the chart, CSNH did a 5 for 1 reverse split back in April. This is the opposite of a forward split. This reduced the number of publicly traded shares 5 for 1, thereby creating a scarcity when buyers come looking for shares.
Fundamentally, according to its SEC filings CSNH achieved $67.1 million in revs in the first 6 months of 2011, and netted $11.8 million.
This equated to Earnings Per Share of $.25 for 6 months, or $.50 on an annualized basis.
If the stock can find its way to a mere 10 multiple, it should trade at $5.00 easily. At the current level in the $.70 to $.80 range, the valuation is simply absurd.
Over the next several weeks I expect volume to materialize and the chart to shape up. As with my other two Special Situations, hundreds of thousands of investors will learn about this stock in the near future.
I could be advising locking in a profit at any time, and will do so with a “Flash Alert” for the subscribers at EmergingChinaStocks.com. You can sign up for free two week tiral by clicking here.
Disclosure: I am long shares of CSNH everywhere from $.40 to about $.68. I’ll notify my subscribers at EmergingChinaStocks.com when I begin locking in my profits.