Orient Paper: Why Boring Stocks Beat Hot IPOs

Includes: AONEQ, ONP, SIRI
by: Richard Pearson

To those investors who were lucky enough to have been allocated shares in the A123 Systems (AONE) IPO at $13.50, congratulations. For those who bought the stock over $20 in the aftermarket, my condolences. The stock peaked at almost $21 and is now trading at $18.76. Thanks to the many readers who sent in their comments on my A123 article. Many readers agree with my investment approach, and of course may others do not.

To clarify once again what I look for in a good investment: I look for high gross margins, growing revenue, low debt, positive cash flow and an attractive valuation (low P/E ratio). Needless to say, I focus on profitable companies only. I focus on industries that are easy to understand, and I deliberately avoid speculating on volatile IPOs or the next potential boom-or-bust technological miracle.

Jim Cramer correctly points out that investors can trade IPOs even if they don't like the company or the fundamentals. As Cramer put it, "they gave away money today." However, this is a very risky game where you really need someone willing to overpay for the stock more than you overpaid for it. If you are fast, sophisticated and experienced, you may do well at this type of trading. Less-sophisticated investors were the ones giving the money away if they strayed into the IPO of Shanda Games (NASDAQ:GAME) , which fell 14% Friday, the day of its IPO -- despite being priced at the top of the indicated pricing range.

Some readers suggested that I do not fully understand A123's future potential, its "game-changing technology" or its big contracts. I don't. I also never understood how Sirius XM (NASDAQ:SIRI) was going to make money off of its business model. Despite the fact that Sirius XM has had huge contracts, game-changing technology and a lack of true competition, the numbers just never added up. Sirius XM has customer contracts with Budget, Avis, Audi, Aston Martin and others. They also have had talent contracts with Oprah Winfrey, the NFL and Howard Stern. None of these contracts matter if the company doesn't turn a profit, and Sirius is now fighting off bankruptcy.

For companies like Sirius and A123, I ask myself the question: How much revenue does this company need to make before it covers its expenses and generates a profit? The answer is in the billions, and that revenue oftentimes do not materialize.

I continue to believe that there are much safer ways to invest, focusing instead on stocks with a solid track record and strong fundamentals, which happen to be overlooked and underpriced. Orient Paper (OPAI.OB) is not an eye-catching IPO or even in a flashy high tech business, but the company is profitable, growing revenue at double-digit rates, cash flow positive and trades on a P/E of less than 5.

To illustrate the contrast, I picked the most boring stock I could find, which also happens to be one of the best potential overlooked investments. Orient Paper is in the boring business of producing corrugated paper and writing paper. The company has a proven track record for revenue growth, growing by double digits in the last three years, and is on track to continue with double-digit growth this year. The company has only $10 million of debt and has been cash flow positive for the past four years. OPAI recently presented at the Rodman & Renshaw China conference in New York and has hired CCG to handle its investor relations, both of which indicate a focus on attracting institutional investors.

Despite all of this, the company trades at only four times trailing 12 month earnings --- for now. This is a company that does not have any game- changing technology and will not grab headlines like a hot IPO. But it is a stock you can buy cheaply and easily understand its business and fundamentals and sleep well at night owning.

Disclosure: The author holds no position in any of the stocks mentioned above