Sunday, September 12, 2010

Chinese RTO Stocks - Gems Available Cheap But Buyer Beware

Here's a China portfolio you can copy/paste into finance.google.com for viewing.

NASDAQ:CAGC OTC:CNOA NASDAQ:CHNG OTC:CAGM NASDAQ:SNEN NYSE:PTR NYSE:CGA NASDAQ:NOEC NYSE:SVM NYSE:SNP NASDAQ:CSKI AMEX:ONP NASDAQ:CHBT AMEX:CMFO NASDAQ:CSUN NASDAQ:FUQI NASDAQ:SOLF NASDAQ:TXIC NASDAQ:YUII NASDAQ:FEED NASDAQ:RINO NASDAQ:VISN OTC:BBCZ AMEX:NEP NASDAQ:BIDU NYSE:CEO NASDAQ:CHIND NYSE:CHU NYSE:JKS NASDAQ:WATG NYSE:YZC NASDAQ:CMED NASDAQ:CCME NASDAQ:CBAK NASDAQ:DHRM AMEX:IDI NASDAQ:XSEL NYSE:WH NYSE:QXM NYSE:ADY NASDAQ:JNGW NASDAQ:SVA OTC:SGAS

Alot of these are the much-maligned RTO (reverse take-overs) Chinese stocks which have performed very poorly. Because they are Chinese companies with American shell companies (to gain access to U.S. capital markets quickly/cheaply - by buying a bankrupt U.S. company that already went through the listing process previously), a very different environment is created. The shorts in these companies are very sophisticated/organized. They do a helluva job, really. There are definitely some shadiness going on - several of the companies in the above list are under SEC investigation and the long-term prospects are doubtful.  Part of it seems to stem from communication, jurisdiction, structural/rights issues, and accounting differences.  I'm sure some good ole white shoe boy crime is involved as well.

It's a bit tedious wading through these companies business and reconsiling it with their market cap. In general they are extremely undervalued w/ the so-called "China Discount" but it seems to me there are some real gems in here.

Many of these stocks IMO have a bit further down to go (and others may never even recoup losses), but some appear to have turned the corner. Here are a few that interest me. I only own CHNG...appear to have nailed the bottom on it.  I have a free position in March/2011 $5 calls (having bought at .75, .85, .95, & 1.05 and sold half at 2.00 and 2.10).

Natural gas/oil - no drillers
CHNG (bottom appears in), SGAS, WH

Agriculture
FEED (close to a bottom), ADY (similar pattern to CHNG), CAGC (more downside short-term), CNOA (one more spike down coming to my eyes).

Clearly, the good strategy for the past decade has been to invest USD into CDN resource companies.  I view investing USD into Chinese resource/agriculture companies in a similar light.  This ensures the wind at our back, in general as an ongoing theme.
-GK