June 5, 2013

Bulls, Bears and Pigs on the 'Correction': So, is this it?

More insightful commentary from Bulls, Bears and Pigs:

Are we getting the long awaited correction? The one that has foiled both bulls and bears alike? If a bull like me was inclined to buy puts just over a month ago and got ran over with them, I can only imagine the destruction that was laid upon the bearishly inclined...which I reckon makes up the 80+% of the trading community. I'll say this again, it doesn't matter how bad the market gets from here because if you've listened to the bears and followed their advice or what they implied you should do, you're broke.

Correction or not, I don't think this bull market is in danger of being over for the reasons I've cited here before many times. But let's not get complacent here. We've had a huge run and so protect yourself or lighten up if you know you'll end up panicking or staying awake at night if the market were to drop further.

I'm still holding my protective puts (which are underwater from where I bought them) along with my 2 longs which make up 80% of my account. Yeah I know, I'm nuts but you know what? These 2 longs I have are financially solid, trading very cheap and so I can be a strong holder of them throughout any volatility.

HWO has been disappointing giving up just about all the gains for the year. The main reason of the latest sell-off is probably because mgmt says it expects no growth in earnings vs last year. Now, if the stock had a p/e of 20+ that would be a concern but when it has only a p/e of 4 it's already pricing in very pessimistic assumptions about growth (making it a bargain) and so I don't think this sell off is warranted nor sustainable. The stock now has dividend yield of 7% and is trading close to book value and so I believe downside should be limited. In fact, insiders of the company have been buying shares on the open market at these prices and the company announced a buyback plan - both of which signal the stock is quite undervalued. The last time   insiders and the company were buying shares like this was in late November when the stock was near a major bottom. Although this year may not provide any fireworks, the longer term outlook (1-2 years) from now looks very good given what appears to be a forthcoming LNG boom in Canada and with further LNG development in PNG. In the meantime, I collect the generous monthly dividend.

My other holding China Greenstar is looking very good. It looks pretty assuring to me that they will see 20-30% growth in earnings this year. They are in the process of acquiring one of their suppliers for a bargain basement price in Q3 and so that will assure that next year's earnings will grow significantly as well. Meanwhile, the stock is still grossly undervalued even with it's move up to $0.98 since it has a book value of $1.42/share and company will likely earn $0.40-$0.45/share this year. I think I can hit a home run with this stock like I did with bev.to in 2010....but this time I loaded up with a lot more shares than I did with bev and so it could turn out to be a grand slam! So long as I don't get any really bad luck, the stock should easily hit $2 by this time next year. The beauty of this company is that the earnings are constant and rather predictable given that their business consists of selling tomato paste, fresh produce and canned fruits. It doesn't sound very exciting but if you look at the cash flows this company generates, its future growth rate and how ridiculously cheap the stock is, it is indeed very exciting! Of course the so called "catch" is that the company is based in China and there's been some bad apples there with Sino Forest being the biggest one. This is why the stock is so cheap. Well, I've done my DD and I'm more than comfortable in believing the company is legit. If they keep producing these kinds of results, it's simply a matter of time that they will get the proper respect by the market and be able to break free of the China stigma and it seems this process could just be starting. If the company is indeed legit, then this is as close as a sure thing as you are going to get in the market. It trades at 2.4 times 2013 earnings and the company has been growing earnings around 15% each year for the last 3 years with this year poised for 20-30% growth and more growth pretty much assured for 2014. You might be thinking if it's too good to be true then it probably is. Well, that's usually the case but you can indeed find these types of situations in the microcap/small cap space since they are overlooked by analysts. My big score with bev.to is a perfect example. When I bought the stock at $0.50 it was pretty much assured that over the next 4 quarters the company was going to earn at least $0.80 a share thanks to a government contract they won. When I realized this I said to myself "I must be missing something here, this is too good to be true" Well it wasn't! The market was quite frankly dumb and I took advantage of it. Only when that cashflow actually started coming in did the stock respond even though the news and mgmt's forecasts made is quite clear that it was coming several months prior. The stock ended up going to $3.40 close to where I sold everything.  I sold because I sensed euphoria in the stock and I wanted to cash in on a big winner. I figured I could always get back in on a dip, but as time passed I realized that I no longer had the conviction to buy back the stock because there was no significant earnings to come after that big contract was over which after the big run up, was priced into the stock. With Greenstar I don't have this issue. I can be assured that people are going to be consuming the food they sell year after year after year without worrying about it going obsolete/out of style. 

This stock has the makings of a grand slam homerun. In fact, I've never felt so excited about owning a stock like this ever! The CEO has a very ambitious goal of making this a $1 Billion in sales company. Pipe dream? Maybe, but if we see just 1/5 of this goal reached I'd make out extremely well. Even if the company doesn't grow and simply pumps out the $10 M in profit it made last year every year going forward,  I'd still make out very well in the long run. For me to be on the losing end, I'd have to be really unlucky here like for instance if China suffers a complete collapse and goes into lockdown mode.