China Medical Technologies: Poised for Growth

China Medical Technologies (CMED) is a Beijing, China manufacturing medical device company, founded in 1999, that develops, manufactures, and commercializes chemiluminescence products, MAIA technology, and FISH technology for the monitoring and detection of diseases and disorders, including ultrasound-based cancer treatments. Just recently, on April 27 the company received approval in China for its Bladder Cancer FISH Probe.

Some of the diseases that this company can help fight include thyroid disorders, diabetes, hepatitis, SARS, Down syndrome, liver fibrosis, disorder related to reproduction and growth, bladder cancer, breast cancer, prediction and diagnoses of cervical and prostate cancer, diagnosis and prognosis of various leukemia and multiple myeloma, and various types of tumors. CMED can also detect Trisomy 21, Trisomy 18, Trisomy 13, Turner syndrome, and triploidy.

While a lot of people without medical or nursing degrees might not know exactly how and what the company does that is OK. All you need to know, as history of the stock market going back the past 130 years has proven to us, is how the fundamentals and technicals are doing. First off, let’s take a look at the fundamentals as this is what allows and gives reason for a stock to make a move from 10 to 200.

When we take a look at the EPS growth for CMED the past four quarters, you can see that EPS has grown 0%, 126%, 104%, and 109%. During that time, sales growth was 22%, 92%, 72%, and 61%. Future estimates on earnings look great also with 2009 and 2010 YOY EPS growth to come in at a 55% and 11% clip respectively.

Taking the growth in EPS and sales, with a ROE of 17%, debt of 69%, cash flow a strong $2.28 to the most recent quarter EPS of .67, a dividend yield of 2.0%, and an EPS Growth Rate of 50%, gives us a very fundamentally strong stock.

Despite these awesome numbers, something very weird is happening. Mutual fund ownership is falling each quarter for the past four quarters from 44 to 38 to 33 to 30 funds. While mutual funds might only own 15% of the shares outstanding, the true believers are the management with a strong 27% of the shares outstanding in their hands.

I believe it is possible that more mutual funds will soon be back into this stock if the EPS and sales growth continue. Not only will growth and income investors be interested but value investors should be also with a P/E ratio a very low 11 which is in the very low range of the five-year range of 5-56.

Investor’s Business Daily confirms the strength in this stock with a top of the market EPS rating of 99, a 75 RS rating, a group RS rating of 40 (weak), an SMR rating of A, an Acc/Dis rating of B, a Composite rating of 92, a Timeliness rating of B, a sponsorship rating of B, and an Earnings Stability rating of 22 (lower the number the better it is on that one).

While fundamentals drive me into picking out which stock I want to go long, the most important part is determining when and how much is on the chart’s setup and the overall market. First off, if the market is not in an uptrend, I don’t care how amazing the fundamentals are. The stock will not make you money based solely on the fundamentals. You need that chart to be very bullish, putting in higher highs and higher lows, with it breaking out of a sound quiet (low volume) chart pattern that is coming from a previous uptrend of at least 20%.

CMED broke above the 50 day moving average and stayed above it in early April. On June 1, 2009, CMED broke out of a slightly longer than a month bullish pennant formation. After the breakout on Friday, the stock broke out above the 200 day moving average, following through on strong volume, on Monday. The signal to get CMED early was on 6/1 but the stock is just now over the 200 day moving average and if it is going to become a monster stock it still has months of work to do before setting up in a proper pattern that has led to history’s biggest stock market winners.

If CMED can continue higher, building a right side of its base, I would love to see it get closer to the old 52-week highs, within 15%, build a handle lasting the minimum five days, and then break out on strong or huge volume with green BOP (the color bars on the bottom window). If that happens that is when I would load-the-boat on this one. For now each pennant formation breakout or heavy volume bounce off the 50/200 DMA will remain places to poke this stock while I wait for its breakout from a proper long-term pattern.

DISCLOSURE: At the time of publication Joshua did not have any position in China Medical Technologies (CMED).

Comments

[Alan Young:]

"Despite these awesome numbers, something very weird is happening. "
When institutional investors flee, that should tell you something. Growth does not always increase profitability. The big debt overhang is certainly a concern worth a closer look. And more generally, with insiders owning a controlling interest, one can imagine all kinds of opportunities they might have to enrich themselves at the expense of public stockholders.
Not making any accusations, just suggesting ways to perhaps explain the "weird" market view.

Jun 04 05:26 PM

[Alphameister:]

I like the fundamentals, the technicals, and the large short position that has recently started to decline. The big debt position has been the only deterrent for me. I've been focusing on low-priced Chinese stocks trading below book value despite surging earnings and have been enjoying extraordinary returns. If CMED pulls back to around 23, I'll probably buy some call options on it.

Jun 05 06:20 PM