KHD Humboldt Wedag Down, but Still Worth Buying for Now

I wrote a long piece on a Hong Kong based infrastructure stock KHD Humbolt Wedag (KHD) when I initiated a position at the beginning of this month. [A New Position Started: KHD Humbolt Wedag] This is in essence a cement-focused infrastructure stock; and one thing I really like is the focus on non traditional markets such as Africa, Eastern Europe, and the Middle East. It is very hard to find stocks that let you play on trends in those markets.

For an example see a list of recent contracts

• Plant engineering and equipment supply company KHD Humboldt Wedag International Ltd. said Monday it received a contract worth about $51 million from Lithuania-based cement producer Akmenes Cementas AB to provide 4,500 tons of clinker a day. Under terms of the deal, Hong Kong-based KHD will be responsible for supplying equipment as well as engineering and design services.
• The company also said it received two contracts in November worth a total of about $179 million. It has an $89 million contract to provide equipment for a cement facility to be built by India's Jindal Steel Works and a deal worth about $90 million from Cairo, Egypt-based Orascom Construction Industries.

With that said, I made an initial stake of 0.7% of the fund in the mid $31s. At the time the stock had support of the 200 day moving average, just under $29. Well when the stock trended back to that level a few sessions ago - it sliced right through it. Quite bearish. Generally this sort of price action indictaes someone "in the know" is getting out, before Joe Six Pack; especially yesterday when volume 'spiked' to 500K shares (this is a very thinly traded stock).

Or it could be as simple as a hedge fund with a large stake facing forced redemptions as it goes into the year end out of business sale. We will never know. But generally since we will never know, I let the price action dictate my moves in the near term. I do get nervous when I see such a 'cheap' stock, that gets cheaper by the day. Usually that means it is not as cheap as it appears on the surface - and someone has a lot more information than I do....

Traditionally I would be selling a stock acting this miserably, but since my original stake was so low as I had just started an initial stake, and the stock has quickly fallen to sub $26, which was also the level it reached at the worst of the market meltdown in August, I decided to add shares instead. So to the 250 shares I already owned, I bought another 300 shares here in the mid to upper $25s. This increases my exposure to 1.2% of the fund.

My battle plan now will be as follows. I will sell these 300 shares if/when the stock rebounds to $28s as that is where the stock will see the 200 day moving average again. Except this time instead of being support it will be resistance. This would (if it works) give me a nice little profit on a trade.

Then it gets interesting. If the stock falls back and trends down lower, then we have a broken stock. If the stock breaks right through this level (near $29) and regains its 200 day moving average, then its bullish and in fact I'd be buying back the shares I had just sold. Might seem strange to buy back shares higher than where you sold them, but again this is a technical call. So that's the game plan; again I traditionally do not buy stocks in this sort of tragically weak position because in many cases (see Coach) they just continue to fall and fall. Stocks under the 200 day moving average are usually on "avoid at all costs" list. But last I checked selling cement to emerging markets is different from selling handbags to subprimed out US consumers. We shall see.

Fundamentally? I see the 2 analysts who follow the stock drop down estimates 10% (which could be contributing to weakness) in the past 7 days, down from $2.22 to $2.05. But this is a company growing anywhere from 20-35% (depending on what numbers you use), selling now for under 13x 2008 estimates. I'll take that risk/reward.

Long KHD Humbtol Wedag in fund; no personal position