Some investors like to play it safe, while others like to look for a risky investment. And for those people interested in a risky investment that could pay off big, look no further than Gulf Resources Inc. (GURE). Recently, the company has been battered by reports regarding its credibility and accusing it of fraud. Whether or not the company is a fraud I cannot say for sure, but what I can do is inform readers why exactly GURE could be a reasonable investment for them.
Tensions were high over Gulf Resources the last few days, mostly because the company took so much time to release its quarterly earnings. Many investors were nervous when Gulf didn't release its earnings by the deadline August 15, and instead waited until the morning of the 16th to do so. Many of the questions that investors hoped would be answered by management, including information about the buyback, were inadequately responded to. These actions seem to be reminiscent of the Deloitte report that showed some internal management issues. Although it was claimed that these problems were fixed, it looks like many of them could have returned.
If you don't consider the seemingly incompetent management, then there are some pretty good things to be said about Gulf Resources, including the great value for price. Some of the promising results from the most recent 10Q include
- Revenue was $51.3 million, an increase of 10% compared with the corresponding period last year
- Gross profit was $26.3 million, an increase of 13% compared to the corresponding period last year
- Net income was $10.0 million, or $0.29 per basic and diluted share, compared with $16.4 million, or $0.47 per basic and diluted share a year ago
- Excluding non-cash impairment/write-off expenses, adjusted net income was $17.6 million, or $0.51 per basic and diluted share.
- In June 2011, the Company announced that its subsidiary Shouguang City Haoyuan Chemical Ltd. Co. had signed a non-binding Letter of Intent with the People's Government of Daying County in Sichuan Province, to explore and develop potential underground brine water resources.
If we look at the EPS for this quarter without the non-recurring expenses, then it looks like pretty good growth, and nothing to be worried about. The company also invested another 4 million dollars into exploration, which also didn't help the lower EPS. These exploratory wells are still under construction and the company will not know until later in 2011 if it will make a return on the 4 million dollar investment. Also, during the conference call, Gulf mentioned that if any investor would like to visit the company and its facilities, they may make an appointment with management and do so.
Another thing of large importance that was released this quarter was the institutions and their holdings. It appears that Goldman Sachs picked up 1,115,607 shares to bring its total shares invested in Gulf to 1,182,042. They had an estimated value of $3,546,000 when purchased. Another big player that added to its position was Credit Suisse. It added 571,198 shares to come to a combined total of 646,868. These investments seem to show that institutions are beginning to see tremendous value in shares of Gulf Resources. Why would an investment firm dump millions of dollars into a company that it thought had a bad outlook?
Gulf Resources remains an extremely risky investment and it is not for the faint of heart or the emotional. Patience is a virtue with the stock after the constant battering it has received, especially from the reports of fraud. But at $2.13 per share, and a P/E of only 1.46, Gulf Resources looks like it could be an amazing deal. Each individual investor should still do his or her own D&D and make his or her own conclusion about investing in the company. But with more transparency and information from management, Gulf Resources could make an excellent investment.
Disclosure: I am long GURE.