In my research, I attempt to provide a combination of both long-term investment ideas and high probability, catalyst-driven trades. I am currently researching a "hidden gem" in biotech that I hope to share within the next few weeks. Today, however, I am stepping outside the biotech arena to highlight a stock with an imminent catalyst that in all probability will catapult its shares significantly higher. The premises underlying the idea I'm discussing today are strikingly similar to those of CombiMatrix, a stock I highlighted last month. I discussed CombiMatrix when it was trading at $2.86, believing the stock was posed to double by the end of the month. CombiMatrix hit my target faster than I had anticipated, at which point, I issued a real-time alert suggesting that some profit-taking may be warranted. CombiMatrix proceeded to surge high as $7.84, representing a 170% return, providing ample opportunity for disciplined investors to do exceptionally well.
Anatomy of a High-Probability Trade
I relentlessly scan the market to identify high-probability ideas like CombiMatrix, in which a number of factors perfectly align. The CombiMatrix idea was particularly timely because the stock was technically oversold, trading at the bottom of a multi-month range, was a speculative momentum name, and had material events on the immediate horizon. Shares of China Auto Logistics are in a remarkably similar position as I write this article.
Similar to CombiMatrix, the stars are all aligned for China Auto. As with CBMX, CALI is trading near the bottom of a multi-month range, has a compelling investment thesis, has had a history of massive news-driven rallies, is experiencing explosive top-line growth, has an enormous untapped market to serve, and has significant catalysts on the horizon.
China Auto Logistics is one of China's top sellers of imported luxury vehicles, and also manages China's largest imported auto mall in Tianjin. Additionally, it operates one of the leading automobile portals in China, as well as three major websites serving China's auto dealers and their customers. The Company also provides a growing variety of "one stop" automobile related services such as short-term dealer financing.
China Auto shares staged a monstrous rally from $1.57 to $7.48 last November, representing a 375% surge in just two days. The impetus behind this parabolic move was a Q3 earnings report highlighting the explosive growth of the company, particularly in the luxury auto market. China Auto reported a 78.3% increase in revenues year-over-year, and sold 130% more luxury autos than Q3 2011.
Mr. Tong Shiping, CEO and Chairman, shared some revealing thoughts into the extraordinary growth prospects of the company:
Looking ahead we remain confident that we will maintain our leadership position in the luxury auto sales industry, with continued anticipated support from our automobile portal and websites which are now established in 50 cities throughout China and we intend to extend to 60 cities. Our aim is to capitalize on this leadership position with an expansion of our current high margin services and the addition of new ones. Underlying our growth strategy is our belief that growth rates for the high-end automobile market in China will continue to exceed those of the mainstream auto market, a view that is shared by several market forecasters.
Shares have since retraced most of that parabolic run in November, have found solid technical support, and are loaded like a coiled spring ahead of the Q4 report. I expect the company to issue a formal earnings date shortly, and to release results by the end of the month. Look for shares to climb significantly as the date approaches, and in all likelihood launch still higher upon confirmation of a blockbuster Q4 report.
Sweet Spot of the Chinese Economy
China is expected to surpass the United States as the largest luxury car market by 2016. The specter of a 20% capital gain tax on the sale of property, and the emerging middle classes with few other investment alternatives, should provide even further momentum to China Auto's explosive growth.
Using any number of traditional metrics, shares of China Auto are insanely undervalued. Shares trade at a miniscule P/E of 2, an infinitesimal price-to-sales ratio, and a relatively unencumbered balance sheet. If shares of China Auto were to trade at a similar multiple as U.S. auto manufacturers General Motors (GM) or Ford (F), which are growing significantly more slowly, the stock would be well over $13. Of course, China Auto's growth is more akin to that of Tesla (TSLA) than of GM or Ford, and the market is willing to assign a substantial premium to Tesla shares based on that growth.
If the market does not soon reward shares of China Auto for its performance, I would expect to see a buyout or "going private" offer as we have witnessed with so many other Chinese companies such as Harbin Electric (HRBN), Focus Media (FMCN), Fushi Copperweld (FSIN), New Energy Systems (GM:NEWN), and the like.
The appetite for luxury autos is likely to remain very robust in China for years to come. It may be affected, however, if China experiences a severe housing crisis or if the global economy spirals downward. Many Chinese small caps have also traded at discounted valuations as the credibility of other companies has come into question over the years. Considering, however, that the market capitalization of China Auto is significantly less than many bankrupt U.S. companies still trading on the exchanges, virtually any potential negative developments appear to be priced into shares already.
The Street handsomely rewarded shares of China Auto Logistics last quarter following an exceptional earnings report demonstrating explosive revenue growth. The fundamentals, technicals, growth prospects, market opportunity, and imminent catalysts all align perfectly. Ahead of and following the Q4 earnings report expected within the next couple of weeks, I expect shares of China Auto to stage a rally reminiscent of the move we witnessed last November when the stock raced to the mid $7s after posting stellar Q3 numbers.