Robert Nilsen's  Instablog

My prior submissions have covered such boring subject matter as Preferred Stocks and Preferred Stock Closed End Funds. My recommendations have preformed less than admirably, but my original premise that I accepted the yields based on my cost have held true.  Lucky for me all those securities continue to day the dividends.

But I do not always make boring picks, and recently two small caps have come to my attention. Agfeed Industries (FEED) and China Kangtai Cactus (CKGT.OB).

The main business of FEED is supplying nutrients and feed to the Chinese pork industry. In addition they have recently expanded into hog production.  CKGT.OB is also in the hog nutrient business in supplying cactus based products which may have numerour health and anti-flu benefits. CKGT.OB is aslo exploring potential boitech products from cactus and (a real stretch here in my opinion) cactus based cigarettes.

From a macro viewpoint, as the Chinese population gains wealth their diet should continue to improve and pork should be a huge beneficiary in this trend. Pork is the most widely consumed meat product in the country and there is no reason to believe this would change.

The financial condition of both companies is excellent and my comments in both cases refers to 1Q 2009 versus 4Q 2008. My profit numbers are defined as EBTDAFC (Earnings Before Taxes,Depreciation, Amortization and Foreign Currency) as I have seen numerous businesses go into bankruptcy with great EBITDA numbers who were unable, unfortunately, to pay the interest they owed.

FEED revenues were $33 million representing a 175% increase over the prior quarter. EBTDAFC was almost $4 million representing a 144% increase.  EBTDAFC earnings were $.104 / share versus $.043/ share.  The balance sheet shows tremendous imrpovements in Accounts Receivable (DSO of 32 days) and Inventory (Days On Hand of 67 days) management and the company has expremely little debt.

CKGT.OB revenues were $3.3 million (a 20%) improvement and EBTDAFC was $.9 million (a 21%) imrpovement.  CKGT.OB probably needs to concentrate more on Receiveable and Inventory management while the company is debt free.

Both companies have been criticized in the past for poor reporting and little transparency, but have make recent efforts to improve in that area.

Like with most Chinese companies, one must "fasten their seat belt" when investing in these stocks, but I view the intermediate and long term prospects as highly favorable.  In the short term one might avail themselves to the highly active put and call markets in FEED.

I have a fair sized investment in FEED (and have written some covered calls from time to time).  I have a small position in CKGT.OB but believe it may have a higher growth rate should the biotech end ever show promise.  As for the cigarettes, do you think many would wish to smoke cactus menthol?

God Bless All and God Bless America.