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Thesis

Shares of InterCloud Systems (NASDAQ:ICLD) have just gone on an epic multi-day run, soaring well over 500%, following a year-over-year swing to profitability and revenue ramp. SGOCO Group (NASDAQ:SGOC) shares are poised to follow InterCloud's trajectory following the release of its Q3 earnings report this week, which should likewise show extraordinary growth and a return to profitability.

Introduction

My first two stock recommendations have richly rewarded those who purchased shares. My August article discussing 9 Compelling Reasons to Own Opexa Therapeutics Right Now marked the precise all-time bottom in shares of that company, which have subsequently surged over 75% in the subsequent three months. My previous article predicting that Novogen would announce a significant partnership materialized just a few weeks after publication. Novogen announced a joint venture with the prestigious Yale University School of Medicine to combat ovarian cancer. Shares surged as high as 76% following publication of the article, and shares have continued to trade substantially higher since dissemination.

Today, I discuss a stock in a high-flying momentum sector with an immediate catalyst that should provide shareholders with an early Thanksgiving windfall. I expect SGOC to post a quarter reminiscent of InterCloud Systems , whose shares exploded from $2 to $16 following an impressive earnings report.

SGOC is in a remarkably similar position to InterCloud immediately prior to the breathtaking surge in InterCloud's stock. Like InterCloud, SGOC is up against exceptionally favorable top- and bottom-line comps. Both have similar-sized floats, and both companies find themselves in red-hot momentum sectors of the market. With regard to SGOC, the Chinese small cap sector has been on an absolute tear. Even speculative China stocks with tepid or questionable growth have gone on some spectacular runs. Witness the parabolic rise in shares of VisionChina Media (NASDAQ:VISN), a 4-5 bagger in recent weeks. Some attribute the run merely to VisionChina's tightly held float. SGOC has a similar float to VisionChina, with vastly superior fundamentals. I am looking for SGOC shares to follow the InterCloud/VisionMedia script and hit double digits following Q3 earnings.

Breakout Quarter Around the Corner

Chinese names that have been able to post favorable year-over-year "comps" have richly rewarded shareholders in recent months, i.e., their revenues and earnings demonstrating material improvement from the same quarter of the year prior. The advantage of a small cap stock not covered by the analyst community is that investors do not have to worry whether the company beats earnings estimates or "whisper" numbers of these analysts. The comps and the commentary that accompanies the release will generally dictate how shares react to the earnings report.

Shares of SGOC have surged immediately following its earnings report in each of the past three quarters. This coming quarter should be nothing short of a blowout, with extremely favorable comparables relative to the prior three quarters. Specifically, SGOC is up against a 2012 Q3 loss of 6 cents on revenues of $26 million. Last quarter, SGOC posted $.20 on over $59 million in revenues, representing top-line growth of 38% and bottom-line growth of 175%. Additionally, the company provided a very bullish outlook in its release. Even if SGOC shows no sequential growth, which is highly doubtful given the Q2 commentary, the headline numbers should turn heads and drop jaws. Investors cheer when they see a swing to profitability year-over-year, as the Street loves to reward a turnaround story. This was quite evident in the reaction to the InterCloud report, and will likely repeat with SGOC.

Fair Value

SGOC shares may represent one of the best values not only in the speculative Chinese small-cap arena, but in the entire stock market. This is a high-growth company, posting a string of impressive quarterly results, doing business in a high-growth country in a rapidly growing sector. The company has clearly mapped out its plans for expansion and for capturing market share. The recently announced China Reform Plan should further help spur growth. Yet SGOC is trading at a mere 1/4 of sales and a P/E in the single digits. The upcoming Q3 earnings report should be the catalyst to a revaluation of the company at significantly higher levels.

Risks

Many Chinese companies trade at what seem like absurdly low valuations because of investor concerns about the credibility of the numbers, given the number of Chinese frauds that have been exposed in recent years. However, SGOC has already been vetted pursuant to an information request from the Nasdaq following an anonymous whistleblower report. These allegations ultimately proved to be false following an independent investigation. Satisfied with the results from the inquiry, Nasdaq continued listing and resumed trading in shares of SGOC, essentially giving the company a clean bill of health and the "all clear" sign. No issues have arisen since.

There is always an inherent amount of risk involved in holding shares of a company's into its earnings report. I normally do not advise doing this except in very limited and special situations in which the risk-reward seems exceptionally favorable. The possibility of unfavorable guidance can not be ruled out completely, but is highly unlikely given the track record of the company, the Q2 commentary, and the recent Chinese macroeconomic developments.

Conclusion

Following the recent parabolic ascent in shares of InterCloud, value investors, speculative traders, and the momentum crowd are all eagerly searching for the next small-cap earnings superstar to feast on for the holiday. If I am accurate in my assessment of SGOC's upcoming earnings report, I expect SGOC shares to follow a similar trajectory, handsomely rewarding those who position into the stock.

Source: SGOCO Group Poised To Join InterCloud In Orbit Following A Probable Earnings Blowout