James Shaw's  Instablog

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Market made seven months of consecutive gains after March bottom:



We made a prediction in early May that market will see consecutive monthly gains up to the end of this year (That is, we will see 10 non-stopping monthly gains this year).

So far so good. We have three months to go to prove our prediction.

Traditionally, September is the weakest month in a year. But this year, we did not see the expected corrections. After one day big drop in the first day of September, market was in momentum rally and made one high after another one.

Now the question facing every investors is how market will go in October.

After yesterday's biggest one day drop in three months, people may think that long-waited correction may finally arrive.  Of course as an investor, we need to prepare for market correction. But this may be another market makers attempt to shake out weak hands. The chart up to this point is very similar to last month's:



September 1 saw a one day big drop and made three days of loses in a row. People talked about September correction then. But we did not see it. Instead, in the following days, market made a very strong come-back.

October 1 made another one day big drop and made another three days of loses in a row. Will we see another strong come-back next week?

We are quite bullish on market's future direction. Of course only time will tell.

In my August 27 post, I introduced one of our Core Holdings: GCI - the largest US newspaper publisher.

After one month of our post, the company announced that its Q3 earnings, excludes one time items, will be in $0.39 - $0.42 range, far more than the $0.28 average estimated.

As a result, the stock had another break-out:



We first bought it at $4.22 after its first break-out and still holding. Now we have near 200% return on our investment in just few months.

Disclosure: our fund holds long position on GCI.

REIT sector has been the hottest one recently as housing market sees a sign of recovery. BEE is one of them.


The stock has been in uptrend since April with higher lows and it broke out its important resistance of $1.80 with huge volumes.
We picked it for our subscribers on 9/14/2009 at $1.32 when it pulled back to touch its lower trendline. The stock doubled its price seven trading sessions after our pick.

BEE is the seventh doubles in one month we brought to our subscribers.

Other hot stocvks in this sector include MPG (another one of our picks for our subscribers) and AHR, etc.

We see no resistance for BEE until it runs into $5.00 area.

SVA, a China's drug company in vaccine sector, is the best performer so far this year among all China ADR's with +543.48% yearly return and +1,084.00% return if calculated from its year low price.

If you look at company's growth history, it is quite impressive:



2009* - the first two quarters result.

From the above table, you can see that its EPS numbers were the same for both 2007 and 2008 even 2008 revenue increased over 38%. That is because the income tax rate increased from 15% in 2007 to 25% in 2008. The company is now asking the local government to restore its income tax rate back to 2007 level (15%).

The company currently has four products in production:

Healive  for Hepatitis A
Bilive  for Hepatitis A&B combined
Anflu  for Influenza and finally and most importantly
Panflu  for H1N1 virus.

The company also has several in pipeline:

EV 71 Vaccine
Japanese Encephalitis Vaccine
Rabies Vaccine for Humans
Rabies Vaccine for Animals
.....

Unlike many US small cap biotech companies, the company has been profitable since 2007.

The main source of its revenues are from the sale of its vaccine products, either in private or public market. The followings are the number of doses they sold to the market during last few quarters where numbers are available:



The following table gives its recent quarter results:



The Gross margin and net margin will increase when the revenue grows larger as the company incurs certain fixed costs. This can be seen from its Q2 2009 result. The net income margin for Q2, 2009 increased to 29% compared with 17.7% net income margin for Q4 2008.

The revenues for these two quarters are $20 million and $12.997 million respectively

Now let us look at Q3 2009 projection:

The Q3 2009 may be the best one in company history as the China government and Beijing government already ordered a total of 5.3 million doses of Panflu vaccine which is to be delivered by the end of September. The company also got order from Beijing government for million doses of Anflu vaccine, also to be delivered by September. If you count on  the company's previous main source of revenue - Healine, the Q3 alone may see revenue of $45 - $55 million, more than the total for year 2008. The net income could reach to $10 - $15 million. That means Q3 EPS will be in the range of $0.24 - $0.35.

What is more, Q4 quarter may be better. Beijing government already indicated that it will make additional order for Panflu in October. Additional order may be on the way from China government.

The world H1N1 vaccine is in short supply. Hong Kong government just visited SVA's Beijing manufacturing facility.

Other than China's domestic market, all others are still speculation right now.

We believe that the current stock price has been fully reflected on its recent development. There is no much downside risk now. But upside potencial is big. Any additional good news will further boost its share price.

The vaccine stocks are is very cyclical. Their runs normally are lasted to year end and may be extended to the following Spring. Check SVA stock price history and EBS trend. You can find out their similar price patterns.

So we are very bullish on its next 3-6 month price trend even the stock has gained so much so far this year.

Higher may go to higher.

Disclose: we are long on SVA

AIG price gained over 370% from its recent low of $13.30 and closed Friday at $50.23.

Many analysts claim that the company's book value is negative and its stock should be worthless for its common shareholders.

Yes, if AIG trys to sell all of its current assets piece by piece, the proceeds may not be able to pay off the government bailout money.

In normal case, the company should file for chapter 11 and no money left for shareholders.

But in the case of AIG, the situation is quite different.

1. First the government baiout will prevent it from bankruptcy;
2. Second the company started  making money ($2.30 per share in its latest quarter);
3. Third, the profit should be sustainable in the following quarters as US and world economy showed a strong sign of recovery. Analysts in general predict that the company will earn over $10.00 per share next year.

Therefore, the company stock has its value.

Let us take a very simple example:

Suppose my company's total current assets is -$10 million and my debt holders are not asking me to return the money to them right now.

In addition, my company starts to make money from now at the rate of $5 million per quarter. In that case, we can return all the  money we owned  to them in six months and the company will have a net worth of $10 million in a year.

What is more, my company's worth should be far more than the $10 million net worth, as in most cases people valuate a company based on its PE and PE of 10 is the normal case assigned to insurance companies.

In the case for AIG, if the company can earn $10.00 per share next year, the stock may be valued at $100.00.

Look at TEN, TRW, (two auto parts companies) and CAR, DTG (car rental companies). Most are still lossing money and all have big debt load. But they are all traded at near year high, anywhere between $10 to $20 now.

Also several big airline companies all have negative book values at the moment. Yet their stock prices turned bullish after their recent earning reports such as LCC, UAUA.

Why?

First, debt holder relaxed the rules for these companies to repay their debt;
Secord, investors believe that those companies will make big profit next year as economy has a high probability of out of recession.

Wall Street is always forward looking.

We all know that insurance companies used to be profitable. And in normal cases the profit is very stable. That is why Warren Buffet bought many insurance companies in his early investment years and made big success.

Now the worst in US economy recession is about over and the insurance business will return to normal soon. We expect ,AIG included to return to profitable soon.

That is why AIG, FRE, FNM, C, BAC, RDN, MTG all made remarkable come back recently.

Disclosure: our fund owns AIG since $13.48, FRE, C, LCC.