This alert was distributed to Stocks Under $10 subscribers Tuesday, Feb. 12. It is being presented here on TheStreet.com to provide analysis on Imax and China Direct. To take a free trial to Stocks Under $10, click here .
We have some important news for two of our model portfolio holdings this morning, and we want to update readers.
announced a positive arbitration ruling that will result in a $9.4 million award to the company.
announced a $12.95 million private placement with a group of institutional investors. Shares of Imax closed Tuesday at $7.05, up 2 cents, while China Direct finished at $6.60, down 46 cents. We are not taking any action in this Alert.
Looking at Imax, a panel of the International Court of Arbitration of the International Chamber of Commerce unanimously found in favor of the company in its dispute with E-City, an affiliate of Indian entertainment conglomerate Essel Group.
The arbitration, which took place in London, centered on an agreement between Imax and E-City to develop six Imax theaters in India. E-City had claimed that its agreement with Imax was nonbinding and that Imax was seeking excessive damages. The $9.4 million awarded to Imax does not include interest and costs, and could bring the total to around $11 million.
Obviously this news is a positive for Imax, as $11 million is equivalent to about a month's worth of revenue. However, we are somewhat skeptical regarding how quickly the matter will be resolved, as the tone of Imax's press release suggests that the company may need to continue putting pressure on E-City in order to enforce the ruling.
Regardless, any payment would serve as a potential catalyst for the stock in the near term. However, we would wait for a pullback before considering adding to this name, as the stock is up more than 40% in the few months since we initiated our model portfolio position.
In other news, China Direct announced a $12.95 million private placement this morning. While we are certainly not fans of the shareholder dilution that occurs when these placements occur, there are some positives in this instance.
For one, the company is already in a strong financial position, with more than $17 million in cash on hand vs. $3 million in total debt as of last quarter. Securing additional capital is a sign that the company will likely continue to snatch up majority equity stakes in attractive Chinese businesses.
In addition, a look at the 8-K filing for the deal shows that China Direct used Roth Capital Partners as its placement agent. China Direct has presented at Roth Capital's conferences before, but this latest deal could lead to Roth's research division initiating coverage of China Direct sometime in the near future. Gaining a sizable research following is important for China Direct in the long term, as one of the difficulties for investors (both small investors and large institutions) is the limited coverage of the company.
We believe shares of China Direct will remain volatile over the short term as the company continues to announce deals and solidify its position in the Chinese market. We like the company's business model and believe there is above-average long-term potential for investors.
However, China Direct is still a small-cap play in the volatile China sector that undergoes considerable swings without major news. We believe the stock remains very attractive for aggressive investors, especially considering shares were trading near $8 early last week.
Imax and China Direct are stocks included in the model portfolio of Stocks Under $10. Frank Curzio writes regularly on stocks priced below $10 a share, such as GMH Communities Trust (GCT) , Smith & Wesson (SWHC) and Krispy Kreme Doughnuts (KKD) for TheStreet.com and for the Stocks Under $10 newsletter
In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research associate at TheStreet.com, where he works closely with Jim Cramer and and writes
. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial, and passed his Series 7, 63 and 65. He appreciates your feedback;
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