The Honest Trader's  Instablog

Recon Technology (RCON) is an interesting microcap company that IPO’ed last week which I think has huge potential for gains in the near and long term. First, the company is very small, so if you don’t like volatility you can stop reading right now as the company has a current market cap of around $30 million.

What does the company do? Actually it looks pretty interesting. Recon Technology, Ltd. provides computer software and hardware solutions to companies in the petroleum mining and extraction industry in China. The company engages in the sale and installation of hardware systems related to heating, maintenance, and processes customized for petroleum extraction. Basically, the Company provides services designed to automate and enhance the extraction of petroleum and it focuses and is located in China. RCON is the first Chinese non-state-owned oil and gas service company to go public in the US.

What do I like about the Company? Quite a bit.

Proprietary Technology - The Company does have proprietary products with 3 copyrights, 8 patents and 4 pending patents. This technology is validated by the fact that this young company’s major customers are CNPC and Sinopec. For those unfamiliar with those companies CNPC is China's largest oil and gas producer and supplier and Sinopec is another major petroleum company in China. Recon has provided services to Sinopec since 1998 and CNPC since 2000. Recon has conducted automation projects for 80% of CNPC and Sinopec's oil and gas fields, covering three of China’s four highest producing oil fields in Daqing, Shengli and Xinjiang. These seem like pretty strong relationships with growing customers.

Small Float - The Company will have 3.9 million shares outstanding after the offering. However, the shares in the tradeable float is ONLY 1.7 million shares. With this small a float you will get a lot of volatility but also the possibility of huge gains as traders buy the stock up on limited supply. This is often when momentum traders come in and things can get crazy to the upside.

Lots of Cash, No Debt – After the IPO, the Company has about $11 million in cash ($2.8 a share) and virtually no debt. That's a lot of cash relative to its current market cap of approximately $30 million (1/3 of the cap in cash).

Insider Ownership – Directors and Executives will own over 50% after the IPO and are selling no shares in the offering. That shows a strong commitment to maximize shareholder value.

Earnings / High Margins - The Company did $9.1 million in revenue in nine months ended March 31, 2009 and diluted EPS of $.83 with net income margins over 20%. Net Income grew over 57% for the nine months ended March 31, 2009 over the same nine months of 2008. The Company should report year end (June) results in the near future and I’d expect approximately $1.10 in EPS for the year on strong top line growth. That would put the current PE at around 7.5. If you assume earnings growth of 50% for 2010 EPS which I think is reasonable based on the base size of the company and the potential usage of the proceeds of the offering for growth you get 2010 earnings of $1.60. That would put the one year forward PE based on these estimates at approximately 5. That seems cheap to me and sounds like a stock with multi-bagger potential.

Conclusion: RCON is a growing microcap company ($30 million market cap) focused on a strong market segment and has quite a bit of sexiness to it. RCON is an IT company, it provides services to the energy industry, and it’s the only non-state owned Chinese oil and gas service company public in the US with great customers. Additionally, earnings and growth could indicate that the stock is undervalued and I expect this stock to hit radars once it publishes June results and reports over $1 in EPS for the fiscal year. With the Company’s float being so small, the stock could get bid up significantly and have the fundamentals to back the price gains up unlike many other small float momentum plays. I like it right here at $8 a share.

Disclosure: Long RCON

This should be dollar negative and gold/commodity positive. Eventually there will be a day when this non-dollar reserve currency "kicks in" for people and they realize this IS going to happen and you will have a sharp drop in the dollar in very short period of time. Full article is below.

Reuters reports China has asked to debate proposals for a new global reserve currency at next week's Group of Eight summit in Italy and the issue could be referred to briefly in the summit statement, G8 sources said on Wednesday. One G8 source who was involved in the negotiations said China made the request during preparatory talks about a joint statement to be issued on the second day of the summit in L'Aquila by the G8 plus the G5 (Brazil, India, China, Mexico and South Africa) and also Egypt. This forum, the so-called "G14", meets on July 9 to discuss the financial crisis, trade and climate change and for the first time a G8 summit will also produce a joint G14 statement. A European source with knowledge of preparations for the summit also said China had raised the subject of a reserve currency debate and that it might be mentioned during the meeting, though the source added: "Any country at the meeting can raise issues they see fit. But whether there is a specific mention in the communique remains open," said the European source, adding that sherpas would discuss this further in preparatory talks on Friday. The debate centres on proposals by some emerging powers that an alternative should be found to the U.S. dollar as the global reserve currency, to reflect the shifting balance of power in the globalised economy.

 

More »

This is a link to Hyperinflation Nation which is a recent documentary on the prospects for hyperinflation in the US and how to prepare for it.

thehonesttrader.blogspot.com/2009/06/hyp...

Definitely worth watching.

More »

Reuters.com reports that China's central bank renewed its call on Friday for the creation of a super-sovereign reserve currency to reduce the dollar's global domination, which it said had worsened the financial crisis. In its annual financial stability report, the central bank did not mention the dollar by name but said it was a serious defect that one currency should tower over all others. "An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis," the People's Bank of China said. In thinly-veiled criticism of loose U.S. monetary and fiscal policies, the PBOC urged the International Monetary Fund to exercise closer supervision of the economic and financial policies of major reserve-issuing countries. The 170-page report dusted off a call by the bank's governor, Zhou Xiaochuan, for the creation of a super-sovereign currency. Friday's report not only advocated a full role for the SDR but said the IMF should be entrusted with managing a portion of its member countries' foreign currency reserves. "To avoid intrinsic shortcomings in using a sovereign currency as a reserve currency, we need to create an international reserve currency that is divorced from sovereign states and can maintain a stable value over the long term," the report said.

Again, over the longer term I see the American lifestyle getting worse as the dollar weakens and begins losing its "monopoly" as the reserve currency. I unfortunately don't see any other result to be honest.

Potentially related postions: Long: TBT, GLD, SLV

More »

I mentioned Friday I took a swing long in TBT (2x Ultrashort Long Term Treasuries). The rationale for this is for several reasons. If you read the blog you know I think yields are going to rise (taking bond prices down) on Treasuries due to ongoing supply of Treasuries as we keep issuing debt to fund "everything", inflation concerns, dollar concerns, etc. However, that is all longer term stuff and I already have a longer term short position in the TLT (long term US treasuries). So why did I add a swing leverage short to my book? Well, Treasuries have surged in recent days and look overbought and right at the 50 DMA (also hitting the downward trendline and the May lows). Therefore, shorting the treasuries at Friday's level seemed like a lower risk trade at that entry. See basic chart below.

More »

More »