Many people say playing the stock market is like taking a trip to Vegas. The all-you-can-eat buffets and real time jackpot ticker tapes plastered around every corner of the casino lures you in before you realize that your wallet has been flattened. The allure of quick profits takes investors to the depths of Silicon Valley, the unknown alleys of foreign cities and the hopes and dreams of misguided "management" teams. But to the lucky few who can count cards and have a keen understanding of betting odds, Vegas can become a calculated gambling experience with exceptional results. Just as in gambling, investing in penny stocks is generally a fruitless endeavor and should not be part of a regular investing routine unless one possesses a special skill set. Like a calculated gambler, a specific formula can increase your chances for success. Here it is: Company affects change to take advantage of new opportunities + it attains profitability + its shares sell below book value per share = potential investment opportunity. Two stocks selling under book that might fit this bill are China Marketing Media ( CMKM) and Obn Holdings ( OBNI).
China Marketing MediaHistorically, China Marketing's core revenue stream came from marketing its magazines and associated print advertising in China. Realizing that the future of advertising is not in print, the story just didn't seem to be one that could deliver growth within my parameter of 30% EPS growth. However, in mid-2008 the company began a new venture that directly benefits from the Chinese consumer's increased appetite for electronic products and an associated boom in the use of credit cards.
During the search for new business opportunities, management noted that credit cards are the fastest-growing consumer credit product in China. Thus, in July 2008, CMKM launched a new online marketing business focusing on selling electronic products. CMKM entered into various cooperation arrangements with Chinese banks where it marketed its new product line through the banks' existing consumer communication channel and received payments through the banks' already developed online payment mechanism. This arrangement allowed CMKM to spend a limited amount of money on advertisement and start-up costs.
Making a ProfitChina Marketing's core business has actually been profitable. However, taking a peek at the financial breakout over the past three quarters reveals an interesting trend. While its core magazine/advertising business growth has been erratic, revenue from China Marketing's new online business has steadily increased from $2.58 million in its 2009 first quarter to $6.9 million in its 2009 third quarter. Also, EPS growth was finally achieved in the third quarter after two quarters of negative growth. It will be difficult to make a final investment determination until I can interview management. For now, I will take a chance on the company because it is profitable and selling below its book value of 54 cents per share (shares were selling at just 4 cents per share a few weeks ago). Hopefully, the company will be able to drive EPS growth as it targets an industry segment that should be a direct beneficiary of the economic growth in China.
Loose Ends to Ponder
- What are the company's capital needs?
- Although the company has finally seen an uptick in the EPS growth rate during its third quarter, gross margins and EPS have suffered due to the extra costs of having to carry an inventory. Additionally, even though third- quarter EPS increased, the number was still in line with 2008 first- and second-quarter figures.
- Due to contractual arrangements, the company's magazine/advertising business may not exist at some point in the future.
Obn HoldingsOBN Holding's roots originated from its satellite broadcasting operations, which it later abandoned. It replaced those operations with an Internet broadcasting and television/film production business targeting the Japanese market. However, this endeavor is still not a significant contributor to OBN Holding's business. In order to fuel growth, the company set out to use minimal investment to acquire other firms that required the management skill and business relationships possessed by OBNI. This "Buffet-inspired" strategy has led to the purchase of three companies expected to fulfill near and long-term plans. Export Trading Business (near-term). In June 2008, OBNI acquired Kyodo USA Inc., a profitable exporter of pork to Japan. OBNI plans to use its relationships established with its prior dealings in Japan, China and the Caribbean to expand its food product lines to include more consumer-oriented items, and grow its customer base in Japan and other markets. Kyodo is just beginning to experience an uptick in its pork business that was negatively impacted by the swine flu pandemic. The export division is expected to be the main driver of growth for the near future. Traffic Violation Information (long-term). In February 2008, OBNI acquired the U.S. rights from a Chinese entity to proprietary technology that captures traffic violation information on video and still media. Its goal is to monetize this technology by selling sub licenses or acquiring a company that can utilize this technology. Plastics Recycling (long term). In February 2008, OBNI entered the plastics recycling industry by purchasing the exclusive North American rights from Foshan Plastics to a Chinese proprietary "green" technology that allows "unrecyclable plastics" to be recycled.
In return, OBNI will provide the raw material, equipment and labor costs to Foshan to manufacture products for OBNI's customers. In North America, OBNI plans to acquire a company that will utilize this technology.
Return to ProfitabilityThe company recently returned profitability, with a business model centered on creating a portfolio of profitable companies will build on this trend. According to its last press financial press release, "OBN expects profits to continue increasing in future quarters."
- We are assuming that the company will require additional capital to implement its long-term strategy.
- We generally shy away from firms that are involved in many different endeavors.
- Current ratio is below 1.
- Working capital deficit of $988,000.
- No proven EPS consistency.