Q3 2009 Earnings Call

November 10, 2009 8:30 am ET

In my continued search for opportunities and anomalies to produce above average returns, I developed a special interest for the impact of 'up listing' of Chinese securities from the over the counter market (OTC) to a full fledged exchange. Efficient market proponents would tell you that a move from the OTC to a major exchange should have no effect on a stock, as it does not change the fundamentals of the company, but I beg to differ.

I believe a security 'up listing' from the obscure OTC market to a major exchange has powerful qualitative implications, implications that usually lead to a much higher valuation of the up listed security, as well as an improvement in the business of the 'up listed' company as a result of the higher valuation and the increased visibility of the business.

At the end of each trading week, Hillbent scans for the equity market for potential anomalies which exhibit extremely oversold and overbought conditions. Past observations have revealed that such candidates may experience reversal corrections to the upside or downside once the market reconfirms that their fundamentals remain solidly intact or relatively poor. From a contrarian perspective, these lists may also serve as a precursor to changes in institutional sentiment and underlying fundamentals.

(The purpose of this report is not to provide specific recommendations, but instead serve as a time-saving reference tool and starting point for investment ideas as the upcoming trading week unfolds. Of course, the results generated are not always perfect and users are strongly encouraged to perform their own due diligence on these names. Note that overbought and oversold conditions are based upon proprietary algorithms and quantitative models instead of conventional technical analysis indicators. As a supplement to this report, please refer to our ETF Trends Report to determine if market direction trends support a bullish or bearish investment bias over short-term, intermediate, and long-term timeframes.)

Investor's Business Daily has its IBD-100 list that highlights the most attractive stocks from an earnings, growth, and relative strength perspective. When the market is rallying, the IBD-100 has historically outperformed, and when it corrects, these stocks usually underperform.

This weekend, however, we wondered whether we were reading an alternate edition of the newspaper. When looking through the top stocks in the IBD-100, seven of the top eight and ten of the top twenty were Chinese stocks listed in the US. We're all well aware of how China has recently been the leading force of economic growth, but given the strength in these names, one has to at least wonder how much of this growth has already been priced in.

In dedication to my recent posts on value investing vs. trading strategies, I decided to focus this week's screen to the market's favorite word: growth. Specifically, the criteria used was positive revenue growth for the next fiscal year. Of course, this does not translate to earnings growth but management teams should have figured out there's a recession and cut the cost side.

In addition to revenue growth, we are looking for companies that can thrive in this recession and take market share. These qualities are hard to quantify but I used ROE and ROA as measures of company quality, with the added kicker of a low debt-to-capital ratio so the company theoretically will have resources to pounce on opportunities.

It was disappointing to see HRBN made little progress with its Shanghai auto micro-motor facility. Production may finally begin in 2Q09, after two quarters of delay from customers and another quarter or two from construction constraints.

At the end of each trading week, Hillbent scans for the equity market for potential anomalies which exhibit extremely oversold and overbought conditions. Past observations have revealed that such candidates may experience reversal corrections to the upside or downside once the market reconfirms that their fundamentals remain solidly intact or relatively poor. From a contrarian perspective, these lists may also serve as a precursor to changes in institutional sentiment and underlying fundamentals.

(The purpose of this report is not to provide specific recommendations, but instead serve as a time-saving reference tool and starting point for investment ideas as the upcoming trading week unfolds. Of course, the results generated are not always perfect and users are strongly encouraged to perform their own due diligence on these names. Note that overbought and oversold conditions are based upon proprietary algorithms and quantitative models instead of conventional technical analysis indicators. As a supplement to this report, please refer to our Market Condition Summary to determine if market direction trends support a bullish or bearish investment bias over short-term, intermediate, and long-term timeframes.)

Those who know me well know that I look for value. I strongly believe that markets are inefficient and that investors are emotional creatures driven by fear and greed regardless of the fundamentals. As a matter of fact, I even developed a theory called the Cyclical Efficient Market Hypothesis (CEMH) to help me, as well as help fellow investors, better profit from market inefficiencies.

However in this article I will not deal with CEMH, but I will look at stocks which are deeply undervalued or perhaps “insanely” undervalued; If you are looking for companies trading for 50c on the dollar, fast growth companies trading at under 2 P/E or companies with 0.5 or lower PEG, in this article you will learn about them, and you will see that there is a whole lot of them: they are called the Chinese Micro Caps.

Q4 2008 Earnings Call

March 13, 2009 8:30 am ET

Q3 2008 Earnings Call

November 10, 2008; 8:30 am ET

Q2 2008 Earnings Call

August 11, 2008 8:30 am ET

Thursday I decided to increase my long positions substantially, adding a number of new holdings to the portfolio. With regards to particular sectors, I decided to inch into the steel sector, as well as get moderately long of a few natural gas producers. Additionally, I increased the size of my positions in junior gold producers. The other stocks I added were pretty much all specific to the company, with no real sector theme. Finally, I decided to divest my holding in (BEAS), because I thought there were better opportunities for my money. Here are my trades:

(CHK)–I bought a small position at $36.23.

In Wednesday’s daily market wrap, I spoke of how I planned to revamp the portfolio Thursday to reflect what I thought was a significant deterioration in both the technicals and some of the fundamentals surrounding the bond insurers. I’ve made a number of moves to shift the portfolio further to the short side, and I will continue to judge the exposure of the portfolio and may become less long and/or more short in the coming few hours and days. Here are my moves so far:

Sold:

I made a number of mostly small moves Tuesday, so I’m going to go down the line and quickly go over the changes to the portfolio.

(GLD)–I shorted a moderate amount of the GLD Tuesday at $90.00. I was looking for gold to open up again to play the fade that I talked about yesterday. It opened pretty much as I scripted it, and so I entered a short that at the moment appears to be very well executed. Gold really looks tired and looks poised to roll over here, and somewhat benign inflation today (and most likely tomorrow) certainly are going to undermine gold over the short term. The volume in the GLD today was massive, and that seems to signal a short term top.

As the closing bell rings on 2007, I figure that it’s time to quickly take stock of my achievements this year. So while keeping things brief, here are some of my thoughts.

Overall return: This year proved to be an incredible year for my combined accounts, which ballooned from about $26,000 at the start of the year to just above $59,000 at year end. Granted, I did add about $9000 to my combined accounts throughout the course of the year, but even if we subtract that money, my overall return for the year was in excess of 90 percent. That merits lifting a good bottle of champagne tonight.

China stocks are overbought; a dangerous bubble is forming; sooner or later this market will crash.

That's what we hear again and again. So is there no fairly or undervalued stock left in China? Should we stop buying and start selling? I don't think so.

This afternoon I decided to put on my selling shoes and exit a number of my long positions. In addition, I got short in a hurry as we broke through the 1490 level on the S&P. In the past few days, I have continually noted that while the market was rising and things were looking decent, we had yet to see volume return to the market on the up days. That negative divergence was the key piece of information in my decision to sell and get short in a hurry, because the lack of volume on the upside hinted that it was unlikely that buyers would be numerous enough to absorb the supply that was going to come out of the market. So without further ado, here are my moves.

Sells

Its specialty is linear motors and special electric motors, which it designs and markets not just to China, but also abroad. Linear motors are more efficient motors, and Harbin holds three patents on its core technology that helps give it an edge over competition. The company supplies motors for a variety of industries and services, including factory automation, conveyor systems, oilfield services, packaging equipment and mass transportation systems. Based in Harbin, China, it currently has 275 employees.

Although the company's fiscal year consensus EPS estimate was recently lowered from $0.89 to $0.74, I still think there is plenty of room for long-term growth. Based on the phenomenal industrial growth in China, which equates with a need for more motors in these key areas, along with the efficacy of HRBN's linear motors and its proprietary technology, as well as its push into new markets, I think Harbin will see excellent growth in the years to come.

Business

Harbin manufactures custom linear motors for industrial applications. Their current products are used in industrial conveyor belts and assembly line systems, oil wells, postal sorting systems, etc. In addition, the company will be expanding into two new areas–automotive electric linear motors (for internal applications) and railcar motors for subway systems over the next year. The company holds 3 Chinese patents protecting broad design features of their linear motors, and HRBN is applying for several more patents.

Harbin Electric

I purchased a large stake in HRBN at $13.20. Harbin is now my largest holding, and I believe it has the potential to be a big performer over the near to medium term. HRBN posted a monster quarter last quarter, and the stock nearly doubled in just about two months. However, since hitting a high of $15, the stock pulled back below the 50 day MA. After two attempts to retake the 50 day MA on heavier volume last week fell short, HRBN has finally managed to retake its 50 day MA in the heaviest trading volume the stock has seen since February. The breakout coincides with news that Harbin was booked to supply electric motors for a major North American auto parts supplier, and I believe the stock is beginning to pick up some momentum. I will get to the fundamentals in an article coming very soon, but with a net cash position of $40 million and a trailing P/E of 13, this stock has room to run from a valuation standpoint.