Adding on Weakness

Frank Curzio

Shares of China Direct (CDS:Nasdaq) have been under pressure over the past month and are currently trading 5% lower at $6.73. We will use the weakness to add 200 shares to our position, which will bring the total up to 1,000 in the model portfolio.

The decline in the company's shares could be attributed to the overall weakness in the U.S. markets or the continued pressure we are seeing in China-related stocks. We do know that the decline is not because of fundamentals or growth potential as China Direct is trading at just five times earnings and is expected to grow those earnings over the next three years by more than 50%, according to Capital IQ.

Since our recommendation, China Direct has drastically improved its financials. The stock intitially traded on the Amex and was then added to the Nasdaq. It is now also included in the Russell 2000 index. However, the stock is now trading at a discount to our initiation price back in October. The drop in share price is frustrating, but we are in a bear market where most investors are selling out of positions and asking questions later.

We maintain our One rating and believe China Direct has huge long-term potential for investors willing to be patient and look beyond the short-term macro headwinds, which have little impact on the company's business model. At the current price, we see limited downside risk and suggest adding shares at these levels.

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