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10 Best Chinese Microcaps
By Glen Bradford

Hi, I’m Glen Bradford. I was only trading my college tuition. As of today I am also trading my roommate’s college tuition. I wrote for TheStreet.com last fall and undertook equivalently 25 Credit Hours of MBA courses at Purdue University. I’m currently in the top 1% of Motley Fool CAPS players. For those of you that want to join me and make something out of nothing, I’m going to introduce you to the most ridiculously undervalued Chinese Companies on the face of the planet.

The requirements for these companies:

1. High Growth.
2. Profitable.
3. Selling less than Book Value.
4. Cheap based on Earnings (incl. Positive Cash Flow From Operations).

I’ll start with the top and work down. The Target value is a calculation composed of 3 parts: 1/3 Book Value + 1/3 P/E of 8 + 1/3 P/E of Growth. I have adjusted some of these numbers to remove 1-time expenditures, the potential of share dilution, intangible equity, etc. To be honest, all of these stocks should trade much higher than their target. This just helps me price companies in the midst of a crisis.

1. China Finance (CHFI) was sold down 50% on record breaking volume Monday while I was backing up the truck of bullishness. China Finance is responsible for helping small to medium Chinese enterprises go public in the United States. What makes this case unusual is China Finance’s assets are highly liquid — they could sell them in the market at the current price. Monday, their largest position Jade Art was unchanged, 2nd largest position Gulf Resources was up 8.3%, 3rd largest China Organic Agriculture (also covered in this article) was up 6.9% on higher volume. It’s not surprising that a company responsible for taking podunk Chinese companies public struggled through 2008. My estimates on this stock put it in 100-bagger territory from its 52-week low of $0.04. China Finance also helped two other of my picks — China 3C Group (CHCG) and Oriental Paper (OPAI). At $0.10, China Finance is selling at less than it’s highly liquid securities, especially after you take into account their price appreciations since December 31, 2008.

2. Gold Horse International (GHII) ran 44.44% Monday on above average volume. An Investor Village page was put up this weekend and had over 300 visitors in the first 24 hours. Not bad for a Chinese Wind Power play that’s profitable and has a P/E under 1 and is selling at 26% of Book Value. Their forecast for 2009 is 30% growth. That was before they announced they are headed to NYC to raise capital for even more growth!

3. Asia Cork (AKRK) manufactures “green” building materials in China. I took the liberty of visiting several local flooring places here at Purdue and confirmed that Cork Flooring is in high demand and is durable. Asia Cork is thinly traded at $3.57M, but at a P/E of 1 when it grew last year by 30% and is adding to production capacity leading into 2009.

4. Oriental Paper (OPAI), as mentioned earlier under China Finance, is growing 30% a year by manufacturing and distributing paper and paper products in China. Cramer recently indicated that things are looking good in the world of Corrugated Paper. This makes Oriental Paper is look even better.

5. China Organic Agriculture (CNOA) bought the Bellisimo Vineyard in California for about $14M and is trading at $23M. Compare this to their revenues in 2008 at $112M. Granted, they paid to much for Bellismo if you are looking at present discounted cash flows. When you look at the value of a California Wine label in China where China Organic distributes the stuff, you begin to see the big picture profit potential.

6. Lotus Pharmaceuticals (LTUS) just ditched their part time CFO Adam Wasserman (who still works for Gold Horse). Management forecasts growth between 30% to 40% and has so much in the pipeline and in progress for a $14.1M company that it’s ridiculous.

7, 8. Qiao Xing Universal Telephone (XING) is trading at $65M. Qiao Xing Mobile Communication (QXM) is trading at $140M. Seeing as how I already like QXM, and how XING owns 70%+ of QXM, shouldn’t XING be valued at least at $100M?
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9. China Energy Corp (CHGY) is enormously undervalued when you take into account the various reasons they have been unable to produce at maximum capacity, for example — the expansion of capacity by 60%, the Olympic Games, and most recently the increase in safety standards. They produce and process raw coal for heating and power generation in Inner Mongolia. My earnings estimates are adjusted to reflect what I’d consider to be normal operating conditions.

10. China Agri-Business (CHBU) is probably one that I shouldn’t tell you about. I keep buying it at around $0.21 and selling at $0.40 (on a daily basis). Remember, that secret cash loop that only exists in video games that you wished existed in real life? This is it. Right now the entire company is priced at $2.59M. Their latest reported cash balance is $8.3M and their liabilities are $561M. Yes — they are selling at less than half of net cash (cash – total liabilities). But, now that you know I can say bye-bye to my infinite money loop.

I’m the kind of guy that questions everything and is willing to take a stand until empirically proven otherwise. So far, my allocation decisions empirically prove that I know what I’m doing — so much for that efficient market hypothesis.

Disclosure: Glen and his investors own chfi, ghii, akrk, opai, cnoa, ltus, xing, chgy, qxm (through xing), chbu, chcg.

CHFI Sold off 55% right now. 3M in volume, I believe that’s the most ever!

We are sitting at $0.09.

The questions you ask:

Why is it selling off?
Can I buy this lower?
Should I buy this, aka — was my value estimation correct?
If I didn’t own the stock would I be buying now?
How much of my portfolio is in CHFI?

Well, I was buying a lot at $0.20 2 days ago. I bought some more just now. Boom?!

All I have to say is… wow! To be honest, I’m never to sure about what’s going to happen. But, if it looks stormy outside or your grandfather’s knees start hurting (a signal of lower pressure, and for you non-geologists/weather familiar people that means that you’re likely close to a storm front. See, high pressure zones run clear skies usually.). Where was I going with this? If you have an undervalued company… If you have a GlenBradford.com undervalued company and price action is starting to take effect, get ready. My companies these days are undervalued by around 700% on average.

No, as my roomate Mazen would put it — I am not blowing smoke into your a$$hole. They teach us discounted cash flows in MBA school and then they tell us to forget about using them to make stock market investment decisions. The lense I like to look through is the following. Imagine I am a corporate officer of my own company GlenBradford. Now Imagine that I have several projects all with fairly predictable future cash streams attached to them. Wouldn’t it make sense to put down the least amount of money possible to get the most back?

Anyway, Below is my radar and a couple stocks you should watch immediately: GHII, ACAS, CHFI, PUDC. They are catching interest.

By Mark Bradford

I am just about an easy-going guy as you can meet.

Sure I get excited when I am in charge of something or other similar times, but for the most part I’ll just move over or stay out of the way when people try to use their perceived power on me because, quite honestly, life is too short to bother with the small stuff.

I have always believed most of what people told me anyway. My dad said “Save your money, son” and so I did. My mom said “Eat your vegetables” and so I did. My professor told me”Invest $250/month in the stock market and you will be a millionaire at the end of 40 years because the stock market returns about 9 percent annually, give or take.” So I did.

In fact, my wife and I invested $500 every month, through thick and thin and sending three kids to college. Like the rest of us, we watched as our life savings seemingly disappeared this past winter, even though they were placed in “safe” mutual funds. Being the easy-going guy that I am, I just shrugged and said, “Give it time, it will come back.”

So I did. That was OK until I watched a 60 Minutes episode in which they detailed how all the mutual fund managers were getting rich despite the bad economy. All of it was and still is perfectly legal, of course. They were still charging 3-5 percent management fees despite incurring huge losses through blatant mismanagement of MY money.

MY money. I have a son who is a budding investment guru. His “practice” portfolio (which included $50,000 of our family money) took a dive this past winter, too. But his losses were approximately equal to or less than my “professionally managed” funds. So, a college kid still wet behind the ears was able to think just like “seasoned pros” who supposedly have my best interests at heart.

My ass, they do. It suddenly occurred to me that every does time I was paying 3-5 percent fee just to dump money into their fund, I was losing money and they were taking (not making) it. They were the ones living the high life and vacationing in Hawaii while I spent two months trying to figure out how to pay an unexpectedly high tax bill.

Then it occurred to me that I didn’t HAVE to let these overpriced underachievers invest my money for me. If I was going to lose an automatic 3-5 percent upfront, I wanted to do it myself. I already had my Internet brokerage account and access to CNBC (my guess is the fund managers are drinking lattes and not watching Squawk Box in the morning). I am able to track the market on my own and, in fact bought the financials at historic lows and have a selling strategy in place.

And I don’t charge myself 3-5 percent. So, I called my IRA mutual fund holder and told them to get me out and send the cash to my discount broker. I filled out all their indecipherable forms and am now waiting for the cash to hit my Internet account. In fact, I have been waiting two weeks for these highly paid mutual fund managers to write a check and get it done. Great service.

When that happens, I will work with my son to choose the most effective accounts for long term growth and stability. I will have my ups and downs and I will make mistakes. But I can pretty much guarantee that if anyone gets a chance to live in the Hamptons on my 3-5 percent this time, it will be me.

When I was in high school in the 1960’s it was a popular phrase to say “Stick it to the man.” Little did I know “the man” would be disguised as some greedy mutual fund manager and that he would bleed me slowly and make me like it.

My change of heart is just my way of sticking him. And I hope others do too.

By Mark Bradford

First, we select those companies in industries which we believe are strong and growing. Second, most companies must have existing profitability with several years of track record of consecutive financial performance. Third, we must believe the company has significant growth potential in terms of annualized growth rate. Lastly, we only select those companies which we believe have strong management teams.

Looks like it could be selling for less than Net Cash as of April 1st.

CHFI, Current Price $0.07, it traded as low as $0.05 this week. The huge selling volume is dissipating.

This is kind of what like Buffett did. He bought undervalued companies that bought undervalued companies. He met these companies at shareholder conferences.

People brag about 10-baggers. Nobody really brags about 100-baggers. They don’t need to. Their reputation proceeds them. I’m stepping this one up. See you at Legendary Status.

China MicroCRAPS? – The Inefficient Market Hypothesis
By
Glen Bradford

The Inefficient Market Hypothesis.
After sitting through my first year of MBA coursework and having the EMF crammed down my throat like trying to eat a spoonful of cinnamon, my gastrointestinal reflexes have had enough. Wikipedia puts it best: “The efficient-market hypothesis (EMF) states that it is impossible to consistently outperform the market by using any information that the market already knows, except through luck. …Empirical analyses have consistently found problems with the efficient markets hypothesis, the most consistent being that stocks with low price to earnings (and similarly, low price to cash-flow or book value) outperform other stocks.”

I’m the guy that sat through upper level psychology courses and disproved a significant quantity of their best-practices by showing that indeed their preferred treatments were statistically insignificant from the placebo. You may think I’m nuts, suspicion always was the signature of incompetence. There has always been room for these type of tipping-point broad-scale logical conundrums. For example, the world used to be flat. Even when proven otherwise, it took years to get to a spherical world.

Empirically disproving a hypothesis normally pushes them into oblivion, but the EMF is one that has been chosen for mindless perpetuation throughout MBA schools across the United States, as evidenced by my curriculum questioning at various MBA Case Competitions.

If you want it… Go get it. Period.

1. Figure out what works
I started with the most successful investor and worked backwords. An overview of what ideas I’ve traversed across can be found here http://web.ics.purdue.edu/~gbradfor/glen/files/Stocks/Abstract.doc . I would like to add that this works in every market and that I believe that every market average can be beaten through due diligence. Do note that settling for average shouldn’t always be frowned upon as it may be satisficing.

2. Do it
Find people that are doing what you want to be doing and start imitating. This is where most people go wrong and lose scope of the fact that if compounding interest isn’t working for them or they don’t know what it is — it is most surely working against them. If it’s not working, you might be doing it wrong.

3. Kaizen
The goal here is to continuously redefine your decision making structure in order to continuously improve your definition of what works to align with what actually happens.

3 New Chinese Microcap Picks as Potential Empirical Evidence Against The EMH

1. Sell less than Cash – Total Liabilities
China Agri-Business (CHBU) is currently selling for less than net cash, is making money, and is growing. It’s really tough to complain about this kind of opportunity. That said, my mom is selling this company because I’ve made her a lot of money on it. I personally think that’s bad logic — because I’d rather sell it at Cash-Total Liabilities

2. Sell off on “Bad” News
China Energy Corp (CHGY) is down over 50% from where we were a week or so ago. This bad news is that they closed down to increase the safety of operations. In my opinion, the long-term good news is significantly overpowering the bad news — especially at this bargain bin price. I have its earnings pegged at $0.15 a share and huge catalysts on the horizon that are simply not priced into the company’s market cap. In fact, I think we are priced to go under.

3. Sell less than what you’ll make the rest of this year.
Oriental Paper Inc (OPAI) has taken a beating even though it’s making more money than it’s going to make for the rest of this year ignoring that it made money this first quarter.

That wasn’t so bad.
Not everything is worth knowing. The person speaking the loudest may have the least to say. Optimistically bounding uncertainty drives aggressive ignorance and the market boom/bust cycle. High power defective reasoning will continue to come from empty suits. Short-sightedness will always weigh in on long-term decisions. The point is this: blindly accepting what other people tell you works to their advantage and not yours. You will only get ahead by being better than average. To be better than average, you must do something different. Keep in mind that this isn’t for everyone. The first step to getting what you want is determining exactly what it is that you want.

I’m the kind of guy that questions everything and is willing to take a stand until empirically proven otherwise. I’m not a scientist — I’m an engineer. I am not interested in learning how things work except for knowing the best way to make them work advantageously. No matter how seemingly self-evident something may be, people still may not understand. Never underestimate the predictability of stupidity.

Bob,

I agree with your analysis on the trend of the Zloty as compared to the actual present exchange rate. Further, I recently also began to appreciate the actual cash flows. As long as you’re not dealing with MBA’s Gone Wild at Enron — you can usually scope out company lies by looking at their cash flow statement in conjunction with their Balance Sheet and Income Statement.

Never underestimate the predictability of stupidity. The human mind loves trends and always expects them to continue. Hence, the dilemma of the Thanksgiving Turkey. It’s from the Black Swan. I’ve picked up a few basic concepts that I plan on applying to how I manage the time in my life.

1. Use what you know to put yourself into situations of huge opportunity with limited risk.
2. The best you can do for someone is give them an opportunity and incentive to take it. The choice to take it is theirs — and theirs alone.
3. Each individual has their own bounded rationality and I’m convinced that people fall into patterns of behavior and the kind of investing that I’m trying to do is not for everyone. It lacks the “really obvious” positive feedback loop that normally is associated with getting work done. For example, if I am shingling a roof — I can see the impact of every nail I hammer. On the contrary, when I am investing — a good investment premise might yield negative returns in the short and possibly long run.

Buffett takes these to the extreme and simply does everything he can in his power to eliminate the risk of loss from the equation. Soros tests every idea by trading money both ways and by being willing to get out/change his mind if the reverse of his initial hypothesis seems to be coming true. I like the structure of the CEDC deal. I’ve seen a lot worse and like you said, this looks like something that sucks now but will get better before the deal is over.

I’m getting pretty good at relating mostly everything to companies — and it helps when describing companies to people who don’t understand them. I run into so many personal optimists that in my opinion really don’t have a chance at this future they have dreamed up because it’s simply not feasible and their short term actions are not leading to their long run targets. As far as companies go, these would be the ones that aren’t making cash. Usually, you can figure these out by looking at their Income Statement and see if they are posting profits while following the laws of accounting. If only it were this easy. But you actually have to run the Balance Sheet to see their Accounts Receivables and Cash Flow Statement to look at if they are even making Cash in their Operating Activities. I get mild entertainment reading stock market headlines and analyst reports.

I’m going to have to agree with your timing and location idea. I’ve never considered it as a trade-off. But, when you look at the scope of opportunity — it is the only trade off.

1. Where?
2. When?

The questions apply to how you allocate your money, time, casual clothing vs. business clothing, your ability to close a deal, etc.

If a marriage only includes 1 orgasm, I might find myself in the judgmental department.

Anyway, I don’t write for the sake of writing and I only write when there is something worth writing about (in my opinion). Sometimes, I don’t even publish what I write because the opportunities would dry up if more people knew about them. I do at least hint about them on my blog. I don’t really come up with my own ideas very often. Mostly, I perpetuate ideas of others who have made it big in the past and apply them to what I understand the world to be today. There are a lot of math gurus that want to come up with the ultimate stock market equation and love finding plausible correlations. I’d rather spend my time outside of theory and in practice of something that empirical evidence indicates to be highly successful. I was always the kid in class that went against the grain whenever the teacher was trying to stump the class — no reason not to apply that same ego in the stock market where it pays $ to be right.

My grandfather got lucky and turned a farm into a golf course.

Glen

From: Bob Bannon
Sent: Sunday, April 26, 2009 2:18 AM
To: Bradford, Glen Richard
Subject: RE: Conference call, CEDC

Glen,

Comments in no particular order:

1. I have thoght that CEDC options were thinly traded, and had concerns that I couldn’t get out of a position in a timely fashion. Didn’t have the ‘nads to take a position in that manner. MY mild manner preferred simple ownership, at least until I became comfortable with how managment is handling the company. in these highly unusual times.

2. I like the dorky analysis. Good for the noggin. Had already read your articles. I appreciate that you are not using them as rifle shots, but rather as tests to see if you can try to figure out, say, “why is this thing so LOW?” As you develop depth of experience, hopefully you will come to think “Why am I making money by stating the obvious?” I have a 30 year real estate background in Anchorage, lots of development/finance/a little buiding. It is a tiny market, water on a couple of sides, mountains on the others. Half Alaska’s population is in this petri dish. Very human scale. You can get to know the players. Sarah and Ted are real people. Ted is not only the US Senator convicted and now no longer convicted, he is the attorney who worked next door, and who loves my wife’s pumpkin pies. I used to watch some local developer putting in a subdivision and think “He is 12 months away from being a success, but 6 months away from being bankrupt.” They were enthalled with the projected P&L of a project, but failed to project each month’s cash flow. Cash flow is more important than P&L, in my experience. That is what I am watching on CEDC. Can they afford to carry on in their specific markets? So far, I think “absolutely.”

Another “take away” from Anchorage: You may have heard that the three most important things in real estate are location, location , location. Don’t go for banality. Dead WRONG. Timing, timing, timing. I had 40 Acres on Klatt Road. Value was $3,000 an acre . . . or $80,000 an acre, and a year later $10,000. I guaranty you the location did not change. The market did. Timing. That is what is happening with CEDC.

3. The agreement to acquire the balance of RAG I believe will demonstrate that the TERMS of a transaction are more important than the PRICE, which is simplly one component of a transaction. I think I am forming the opinion that the transaction is very well structured, specifically to allow CEDC to earn their way across the minefield of the Zloty over time. Ome aspect which I like is that if the share value increaseses and the market allows, CEDC can gen some cash through equity placement and pay off the entire transaction early, BUT is not required to do so.

3. “Of course it must be legal, because otherwise they would not do it.” A cynical comment on my part. Followed instantly by “More specifically, they probably have an attorney’s opinion that it is legal, which is not exactly the same, now, is it?” Visit a law library. Huge. A scrillion books. Look at the ethical guidelines for the state bar. It is a pamphlet.

Ambrose Bierce in “The Devil’s Dictionary” defined an attorney as “One skilled in the circumvention of the law.” My memory, but you get the gist.

4. One last constructive thought on your dorky analysis. My review of the Zloty exchange rate over, say, 6 months, led me to believe that the Zloty exchange rate is not as important to the CEDC share price as the TREND of the exchange rate over a short time frame. Observe that there are many times when a specific exchange rate exists, ‘frinstance 3.2. CEDC price wil be increasing, o
r decreasing, I believe depending on the trend obvious to the market at that instance, rather than the specific rate of 3.2. IF the market perception is that exchange rate trend is favorable, the share price she move up. If the perception is that the exact same exchange rate sucks and is getting worse, the price she goes down. All I am suggesting is don’t look at something as a snapshot, look at it as a movie clip. A snapshot of a plane landing tells us very little. A ten second clip of the landing shows the floats ripping off and plowing in, OR a greased landing and the pilot waving to his wife and friends.

Anchorage went through an earthquake, say 8.4 Richter scale. A certain amount of destruction. My thought: the highly esteemed Richter scale not a good indicator of what is going on in a quake, but it has become the news clip cliche, sort of the “Dow Jones Industrial Average” of earthquakes. If the quake had lasted 30 seconds, they would have written books about how great the Anchorage building code was. Unfortunatley, the quake lasted over 3 minutes, plastic failure (liquification) occurred in the underlying clay, which ran out from underneath some buildings, which sort of . . . turned over, broke the connections, collapsed. Not a good thing for a multi-story building. Not good if you are standing on the wrong side of that building. So they wrote books on how our building code failed. The Richter scale, you see, does not address the duration of the event.

I think truly important things should be viewed over some time period.

Marriage should not be judged by an orgasm.

I appreciate your comments, and I give them significant weight. I find I often do that when I agree with someone!

Bob
—————————————————–

Bob,

I’ve been bullish on CEDC for a long time (since about $40). I also noticed the Zloty destroying my position in CEDC. That’s why I dumped the stock and used the proceeds to buy Call Options on CEDC that expire January 2010 — effectively leveraging up anticipating that the global appetite for risk would eventually turn from ‘widespread panic’ to ‘risk is sexy.’ I did this back when CEDC was around $25 on its way down. I also did this with a few other companies. With this position, I’m not really watching the daily trading shenanigans that I’d be watching if I owned the stock. I’m just waiting patiently for everyone to drive the price back up so that I can make some big money.

I ran some dorky engineering/statistical analysis with some basic assumptions on CEDC a couple months ago which still apply: http://seekingalpha.com/author/glen-bradford/comments/symbol/cedc

I say this thing will appreciate back to $40 by then. As far as what happens this week, or Monday specifically— it looks like this is a stock exchange deal. The higher CEDC goes in the short term, the better it is for CEDC.

I don’t plan on listening to the conference call. I’m biased to reading the transcripts that come out within a week. I’m not a believer in the efficient market hypothesis — so I don’t think that news released instantly changes stock price to reflect value. I believe achieving value takes time. Otherwise, looks like some huge news is on the way.

You did say something that’s not always true: Of course it must be legal, because otherwise they would not do it.

This is one of the stocks I am incredibly confident in as far as outperforming the market over the next year goes.

Only time will tell if any of my ideas are right: http://caps.fool.com/player/bradford86.aspx

Glen

From: Bob Bannon
Sent: Saturday, April 25, 2009 7:56 PM
To: gbrad
Subject: Conference call, CEDC

Glenn,

WE have not met, but I am a fellow shareholder in CEDC. Read Alpha for various items. I assume you will be listening to the CC before the market opens Monday?

I picked up on two interesting details when reading their previous filing, where they discussed increasing their RAG position by purchasing/renegotiating with LION, which is the Kravitz stable of fast movers in London.
(Seen their website? ‘Barbarians at the Gate’ with James Garner? Got to. Requisite for understanding Lions folks.)

My opinions: One, in retrospect, managment is jumping up and down with their hair on fire, very much is trying to put out signals that the share value should go UP. When you realize that they have to issue additional shares of CEDC to LION if the share values dwell below certain benchmarks, ($12 and $20 range) we can see that CEDC managment must have been wailing when share price was around $6. Mucho happier now, as am I. TWO, very unusual item, I thought, to find tucked away in the discussion of RAG a factoid that certain “Executive Sales” folks were NOT on the CEDC payroll, they were compensated by CEDC customers, who were their employees, and CEDC provided discounts to those customers, which kicked . . . er, provided the compensation to the employee of the customer firm. My guess is that those individuals are decision makers on which booze/who’s booze to buy. Call me cynical, but I found that interesting. Of course it must be legal, because otherwise they would not do it. More specifically, they probably have an attorney’s opinion that it is legal, which is not exactly the same, now, is it?
In another part of their filing, they crowed about how successful their executive sales arrangements had been, but were pretty vague about exactly what they were talking about. That raised the flag.
Don’t know what to do with that, but I like knowing what is going on when people are trying not to use English in a clear manner.
I don’t like the “huh?” factor.

Zloty. Basically, I have come to the conclusion that I have no control over it, but I have a clear map of the negative correlation between share price when
http://finance.yahoo.com/echarts?s=USDPLN=X#chart1:symbol=usdpln=x;range=5d;compare=cedc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

and since I can use that link to peek at the zloty trade in europe every stinking day for hours before NYSE opens, I will watch like a hawk and adios if a ‘trend to grim’ emerges over several days. Not going to ride the roller coaster down from 20 to 6 again, now that I have found THAT little detail!

Had enough of the “Wheeeeeeeee!” factor last time. All I want now is the chain ratchetting us up.

Have you an expectation for Monday’s CC?

Bob

My Radar

If it’s any constellation, So far I’m winning on this one in motley fool caps.

So, what does Goldman have to do to get back to $235 from $120?

For starters, that was the all time high of GS. Further, that’s a 95% return from where we are today.

Historically, their revenue growth: 32% and net income growth 24%.

A lot of their current price depreciation is directly a result of market uncertainty. Over time, the VIX will get back to $25. http://finance.yahoo.com/q?s=^vix

From May 2007 to November 31st 2008:

The VIX rallied 400% from 12 to 80.
Meanwhile GS declined 46% from $227 to $120.

Present values:
VIX $37.14
GS $120.36

Reverse this trend and put the VIX at $25 in 2014. This implies that GS will get back to $170 simply on the decreasing uncertainty over the next 5 years.

That still leaves a huge gap. That means that GS needs to start making money and have a growth rate. Under normal conditions, a company’s market cap reflects its current earnings and it’s expected growth rate. The larger the company, the more close to this intrinsic value the company approaches. A couple rule of thumb formulas for calculating a reasonable price are PEG = 1. In 2007, GS reported an EPS of $24.73 per share. That puts their highest price at a P/E of 9.5.

For Year End P/E ratios: Notice the decreasing trend from 2001 through 2007 even though Earnings and Revenues were growing. The estimated 2009 Earnings are $9.80 and the 2010 Earnings estimates are $12.18. Chalk those up to a P/E of 14 and you’re at $182. $235 requires a P/E of 19.5 off these numbers, implying a growth rate of somewhere around 19.5%. What is the best way for GS to achieve this growth rate when the real estate deals that they’ve been pushing into huge dollar deals are not an option anymore and they’re going to be writing off losses for a while?

Let’s see what’s going on: http://seekingalpha.com/article/130909-the-goldman-sachs-group-inc-f1q09-qtr-end-3-27-09-earnings-call-transcript?page=-1&qa=true

http://www2.goldmansachs.com/our-firm/investors/financials/current/annual-reports/financial-section-2008.pdf

Well, it looks like they’re going to be giving $1B to Warren Buffett for a few years looking forward.

For starters, sifting through their financial statements and investor annual reports is mind boggling when you take into consideration that they’re not marking-to-market, but mark-to-model (aka. Mark-to-profit)

Our global core excess pool of liquidity reached record levels during the first quarter of 2009, averaging $164 billion during the quarter.

With 462M shares outstanding, using $100B of this liquidity in order to buy reasonably rated fire-sale bank mortgages at 30 cents on the dollar with an assumed yield rate of 4% will bring in a potential net income of ($100B/$0.30)*(0.04) of $13.3B a year in earnings. Throw in a default rate of 50% and you still are pulling down $7B a year. (This would boost the stock price hugely as it would be about $15 a share EPS).

Letting money sit on the sidelines when there are assets being sold at panic/fear/irrational prices is not exactly a bright thing to do. If GS is really smart, they could target Foreign mortgages in areas like Poland, where the currency has been destroyed and is bound for a rebound, the market is set to outgrow the US, and the government is looking for stability.

Why GS has that much excess liquidity is beyond me. I think that getting back to that share price is pretty feasible if they put their money to use intelligently. If they wait for all the deals to disappear before doing anything, that’s just plain dumb.

Personally, 100% upside in a stock doesn’t excite me and I am proud to say that I am not foolish enough to own Goldman Sachs. I bought into a company today selling for less than half of cash-total liabilities and am up 100% on it so far.

Hope this helps? You may have been looking for fancy algebraic models of combinatorial power formulas. Those just don’t work. They lull acadamians into false senses of security. See Epistemic arrogance.

Glen

From: Gold, T
Sent: Tuesday, April 21, 2009 6:35 PM
To: Bradford, Glen Richard
Subject: RE: Corporate Valuation

I think 5 years will be better. Once we have a base model we want to run some sensitivity on the returns they will see from the investments they are making to get out of this mess.

Thanks for the help.

Tim

________________________________________
From: Bradford, Glen Richard
Sent: Tue 4/21/2009 5:22 PM
To: Gold, T
Subject: RE: Corporate Valuation
Ill come up with something tonight. Seeing as how I spend more time analyzing companies than doing mba coursework and how I recently dug deep into banks… What’s the time frame? 1 year? 5 years?

—–Original Message—–
From: Gold, T
Sent: Tuesday, April 21, 2009 6:15 PM
To: Bradford, Glen Richard
Subject: Corporate Valuation

Hey Glen,

Given your expertise in the area of corporate valuation, I was wondering if you could help me out. For our Finance 3 paper we are focusing on Goldman Sachs and the things they will need to do to get back to $235/share. This is probably aggressive and as a starting point we will be attempting to price Goldman Sachs at its current level of approx $120. Do you have any models that could do something like this, do you have any recommendations on an approach? We were going to look at their current strategies, like purchasing “toxic” assets, along with other things to determine what types of returns they would need to see to increase their value to a level that would demand a $235 share price.

Let me know what you think if you have some time.

Thanks,

Tim

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1	$0.95	$1.78	0.017	2440%	xing	$ 1.78
1	$0.13	$0.08	0.160	1725%	ghii	$ 0.08
1	$0.20	$0.15	0.189	1421%	opai	$ 0.15
1	$1.52	$2.73	0.039	1378%	qxm	$ 2.73
1	$0.20	$0.16	0.122	1147%	nwd	$ 0.16
1	$0.09	$0.10	0.186	1019%	akrk	$ 0.10
1	$0.34	$0.30	0.444	944%	cnoa	$ 0.30
1	$0.24	$0.32	0.337	799%	ltus	$ 0.32
1	$0.85	$1.44	0.163	676%	cno	$ 1.44
1	$1.00	$2.48	0.113	671%	cxpo	$ 2.48
1	$0.16	$0.28	0.306	642%	pudc	$ 0.28
1	$0.27	$0.39	0.328	632%	lpih	$ 0.39
1	$0.15	$0.22	0.413	603%	chgy	$ 0.22
1	$0.70	$1.54	0.633	477%	cneh	$ 1.54
1	$0.23	$0.40	0.303	474%	ckgt	$ 0.40
1	$0.07	$0.18	0.847	402%	cyxn	$ 0.18
1	$0.10	$0.30	0.422	390%	chbu	$ 0.30
1	$0.51	$1.40	0.840	380%	chcg	$ 1.40
1	$0.60	$1.82	0.652	337%	chme	$ 1.82
1	$2.16	$6.78	0.735	258%	gnph	$ 6.78
1	$0.50	$1.68	1.783	237%	caei	$ 1.68
1	$0.48	$2.20	1.114	234%	cmfo	$ 2.20
1	$0.16	$0.72	1.297	233%	csgh	$ 0.72