This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Three Cash-Rich China Stocks

Obviously, in a valuation scenario like this, you're sometimes getting a business which has some issues. I liken it to getting a great discount on a used car vs. buying a full-priced new car. Even if you don't want the used car you can probably get a great resale value out of it since you got it at such a bargain price.

This is a trade that only works for me a few times a year and it takes a lot of patience, but right now there are a few stocks that are jumping out on my watch list that are trading near cash per share.

Unfortunately, the COGO trade already has started to pass us by. The stock trades at about $7 a share and has about $3.30 a share in cash. The stock recently traded as low as $5.49 in November and I was watching it every day, waiting for my target of "anything with a 4 handle." Since then COGO has bounced 35%. At this level, the stock is no longer a low-risk cash vs. market-cap trade, but it still looks cheap in terms of cash adjusted per-share earnings.

Google Finance shows the stock at a price-to-earnings ratio of 38, but this is incorrect. The 38, backward-looking P/E reflects two very ugly quarters - the fourth quarter of 2008 and the first quarter of 2009. But the company is largely back on track.

If Cogo Group continues with stable performance as it has done the past two quarters, it would place the stock on a forward P/E of only 5 times (if you expect $60 million in recurring net income vs. market cap of $265 million. Adjusted for cash means that even buying COGO at $7.37 results in paying only 2.5 times expected earnings.

I just bought HQS this week and I think it is a "no brainer" trade. At the current price of $7.07, HQS is trading at almost exactly the value of cash and receivables on its books. The company has nearly $100 million in cash and receivables, no debt and is profitable.

While the stock has had some ups and downs, it is on track to make around $12 million to $15 million in net income, according to my estimates, this year. That is about $1 a share. The way I think of it is that because the stock price is backed by 100% cash and receivables, I'm getting my dollar for free. The cash adjusted P/E on this type of trade is effectively zero.

In June, HQ Sustainable raised $12 million in an equity offering at $8.50 a share run by Roth Capital, so presumably there is a large group of institutional investors who already have done their homework. The deal was done prior to the close of the second quarter.

At the time of the deal, HQ Sustainable's first-quarterly earnings were only $1.1 million. Shortly after the deal, second-quarter earnings were announced at $2.2 million, double the previous quarter. Earnings for the fourth quarter came in at more than $4 million, again almost another double. In my way of thinking, if institutional investors were happy to buy this stock in June at $8.50 based on $1.1 million in previous quarter earnings, then I should be delighted to buy it now in the $7 range based on earnings of more than $4 million in previous quarter earnings.

This pattern of rising earnings but a falling stock price spells opportunity. It is identical to the pattern on COGO, but I was a bit too stingy in trying to pick my "in price" on COGO, so I didn't want to make the same mistake by missing out on HQS.

Another cash rich name is Acorn International, which just paid out $29.3 million in a special cash dividend to shareholders. This is clearly a great thing for long-term shareholders looking to realize value out of the stock. But for someone looking to do a quick cash vs. market-cap trade, the special dividend is a problem because it is taxable. Think of it this way, if XYZ trades at $10 a share, has $10 a share in cash and declares a $10 special dividend (giving away the whole company), you the investor just paid $10 for the stock but will get $8.50 back after taxes. Ouch.

In the real world, companies aren't going to give away the whole company, and there will be some math to do to evaluate the size of the dividend vs. the impact on the share price, etc. In any event, now that the dividend is paid the risk of a near-term subsequent dividend seems low and the valuation of Acorn still looks good.

Post-dividend, ATV has about $120 million in cash vs. a market cap of $143 million. As usual, a backward-looking P/E ratio tells us nothing. Acorn lost money in two of the last four quarters, so there is no meaningful P/E. But it looks as if ATV will have three profitable quarters this year.

If earnings come in at the mid-range between second-quarter and third-quarter results, Acorn will earn about $20 million this year implying a P/E of around 7 times. If you back out the cash (which is still at 80%-plus of market cap) you are really only paying 1 times this year's earnings. It's a nice deal while it lasts.

Please note that due to factors including low-market capitalization and/or insufficient public float, we consider COGO, HQS and ATV to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. Until 2005, Pearson was a director at Deutsche Bank, spending nine years in equity capital markets in New York, Hong Kong and London. Previously, he spent time working in venture capital in Beijing. Mr. Pearson graduated magna cum laude with a degree in finance from the University of Southern California and studied Mandarin for six years. He has frequently lived, worked and traveled in China since 1992.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
COGO $0.00 0.00%
ATV $1.54 0.00%
AAPL $132.54 0.00%
FB $80.54 0.00%
GOOG $540.11 0.00%

Markets

DOW 18,232.02 -53.72 -0.29%
S&P 500 2,126.06 -4.76 -0.22%
NASDAQ 5,089.3620 -1.4320 -0.03%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs