China’s Microcaps: Stay Alive and Catch the Wave $CNAM $MYST $CDBT $CGDI

So, I tried to catch the Chinese uplisting wave but the closest I got was Hawaii.

Although I only caught 2 seconds of wave and experienced over an hour of what might as well be fighting for my life trying to surf Hawaii, I’ve come away with 4 key insights that I believe would help even the savviest of investors. I also have 4 Chinese companies that are selling at remarkable discounts to my calculated intrinsic value.

1. Understand the currents and don’t get swept away. The first thing I did upon entering the water was to get swept out to sea. Market’s boom and bust in cycles much like waves come in sets. Right now China Armco (CNAM) is a great way to play inflation, liquidity and China. They import, distribute and refine metals into and around China; a natural hedge against inflation. They just got backed by two lines of credit totaling $25M, a little less than their present market capitalization, and have access to new liquidity for expansion. Trading around $30M and having given guidance a couple years back with earnings around $15M and putting down a huge Q2 with the assistance of a onetime transaction affecting revenues by $10.6M. Not to mention that the metals market in China is turning up the heat faster than Chef Ramsay.
2. Don’t start with the short board. There are tons of fancy investing strategies that don’t get you anywhere. Get a good undervalued company and go long and strong in a bull market as I said 2009 would be in January and caught nothing but criticism. Skystar Bio-Pharmaceutical Company (SKBI) is priced to shrink at $14 and is far from it. Fancy investment strategists might suggest you run a covered call strategy on Skystar. That’s nonsense and is in fact riskier in my opinion as you limit your gains on a company that is ridiculously undervalued in the first place. The only way to play a gem like Skystar is to go long and strong and ride with them through the completion of their vaccine manufacturing facility in Q4. Skystar is so cheap you are nuts if you don’t own it, just as I was nuts to start on a short board.
3. Don’t start in an arena surrounded by hard knocks. In some instances, perception is everything. China Dasheng Biotechnology (CDBT) is a small Chinese company that makes and distributes additives for livestock feed. Although the company is firing on all cylinders, it’s priced to shrink 75% when it just pulled triple digit growth (xxx%). The school of hard knocks in investment land is the OTC market as many unloved companies inhabit it. In Hawaii, I started surfing the rockiest I’ve ever seen and proceeded to get beat up on the rocks. But once I was able to escape the rocks, the panic subsided and things got better — as I expect it to be for the stockholders of China Dasheng in the coming year.
4. If you can’t do it, don’t keep trying — go find another spot. In this regard, China Growth Development (CGDI) might be that spot. China Growth leases units in shopping malls and pulled double digit growth in Q2 and is priced to shrink 50%. I learned never to surf a short board, at high tide, in rocky waters. There were definitely safer waters on the Big Island, as I found out later. China’s shopping mall future looks brighter to me than that of the USA. Why not take advantage of the discrepancy?

The thrill of the chase will get even the most unknowledgable of investors to launch out and try to make it big. Just look at the parabolic nature of the Shanghai Market in the last 5 months and the Nasdaq in 2001 and you’ll see the wave of ignorance as I call it. What they don’t realize is that making it big takes practice, persistence, guidance, and a little bit of good fortune. What looks so easy on land or on television is never as easy as it looks — as I found out fighting for my life in Hawaii.

Disclaimer: Bradford was long China Armco, Skystar, China Dasheng, and China Growth at the time of publication.