Welcome, Guest. Please login or register.

Show Posts

This section allows you to view all posts made by this member. Note that you can only see posts made in areas you currently have access to.


Messages - justo

Pages: [1] 2
1
OTCBB Discussion / Positive Cancer Treatment News for GALE
« on: June 05, 2012, 09:46:41 AM »
GALE up slightly this morning on positive news. Seems to be hovering right now around the $1.40 level. If it can break $1.45 be ready for the ride.  Here is the news article about positive results from its cancer treatment.

http://investors.galenabiopharma.com/releasedetail.cfm?ReleaseID=680008

2
OTCBB Discussion / Huge Volume on GGSM
« on: June 01, 2012, 09:37:32 AM »
GGSM huge volume on news announcement that they are acquiring 50 aditional acres of prime Alluvial Diamond and Gold Mining Concessions in Sierra Leone. Stock already up from yesterday!

3
OTCBB Discussion / Re: Fantastic Buy of CTXIF
« on: March 02, 2012, 12:15:11 PM »
I’m a little late on announcing the highlights of China Linen’s past year, but here they are:

1.   Increases in revenue from $49 million to $64 million. Increase of 30%.
2.   Net Income increases from $9.5 million to $12.3 million. Increase of 29%.
3.   Basic EPS of $2.11 (which is insane, as the company’s stock is currently trading at $1.60). Diluted EPS of $1.80. This gives P/E ratios of 0.76 and 0.89, respectively.
4.   Cash position of $0.86 per share. That is over half its current share price.
5.   Net Working Capital of $5.21 per share.
6.   Net Assets of $8.03 per share.

The company continues to perform as can be shown by their financials. Management is making excellent decisions. I would watch them closely, as they will continue to expand this company by acquiring dying plants. The company is a great buy at its current price, $1.60, as there is an extremely large upside potential. With $0.86 per share in cash and the over $7 per share in assets, you get a lot for a little. Look forward to a great year in 2012.

@JustinG101

4
General Discussion / 2011 Stock Performance – A Year in Review
« on: January 07, 2012, 05:46:25 PM »
With the year ending I decided to post how well the stocks that I announced performed this year. Here are my results 2011. You could have definitely outperformed the market if you followed these picks.
 
1.   EERG – I liked this junior oil stock back in April at $0.35. It was interesting to me because the merger would have pushed the share price higher. It was a little speculative, but it still paid off. Since the announcement the stock rose as high as $0.45. If you sold at the high point you would have had a return of 28.5%. It has also merged with American Eagle Energy, with the new symbol for the two companies being EERGD. The new stock currently trades at $1.35.

2.   DCHAF/DSM – I picked this rare metal holding company stock back in May at $0.49. I liked it because it was essentially a mining company except it purchased rare earth metals instead of mining for them. With China announcing that it was going to decrease the amount of rare earth metals it exported (thus increasing the price of rare earth metals), DCHAF/DSM was a no brainer. The stock rose as high as $1.24. If you sold at the peak you would have a return of 153%! It currently trades at $0.53. With assets worth $1.47 a share, the stock is still a great buy at this price.

3.   CTXIF – I announced this textile manufacturing stock back in July at $2.20. Since that time the stock rose to a high of $2.60, up 18%. I still love this company and expect it to do very well in the New Year. The stock’s current price is $2.17. It’s still a great buy, especially considering the Net Asset Value per share is $6.11, a conservative liquidating value of approximately $4.06 per share, and net working capital of almost $32 million. The company is also sitting on just over $5 million in cash, or $0.72 per share in cash. The company is continuing to grow very rapidly and since 2010 has acquired an additional yarn spinning factory to include in its operations. I strongly recommend everyone to look into CTXIF, as the company and its management are still grossly undervalued. Look for this stock to perform well as the company continues to expand. For further information check my other posts on CTXIF.

So 2011 was a good year, even with the market downturns which most people suffered from. Feel free to post some of your success stories and share how you did in 2011!

Justin Gruenthaler

JustinG101 - Twitter

5
OTCBB Discussion / Re: Fantastic Buy of CTXIF
« on: November 15, 2011, 10:59:26 PM »
Third Quarter Financial Results

I just finished listening to China Linens conference call and going over their Q3 financial statements. Here are the results:

•   Revenues increased 15.2% to $16.2 million
•   Gross profit increased 25.5% to $5.5 million, up 280 basis points to 34.3%
•   Net income increased 8.2% to $3.1 million
•   Diluted EPS was $0.45 for the quarter and 1.41 for the 9 months ending,
•   P/E ratio of 1.3X for the 9 months ending
•   Cash position of 5.1 million, or 0.72 per share.
•   Working capital as of September 30, 2011 totaled (approximately) $34.2 million (4.78 per diluted share).
•    The Company had total shareholders' equity of $43.7 million (6.11 per diluted share) at September 30, 2011, with total assets of $63.3 million versus total liabilities of $19.6 million, compared to total shareholders' equity of $32.2 million at December 31, 2010, with total assets of $51.6 million versus total liabilities of $19.5 million.
•   The book value of net assets per diluted share was approximately $6.11 as of September 30, 2011.
•   Liquidating value (using very conservative figures such as only receiving half the monetary amount for inventory) is approximately 3.32 per share (2.71 diluted). 

The company is continuing its growth strategy, and should finish the year quite strong.

6
OTCBB Discussion / Re: Fantastic Buy of CTXIF
« on: October 25, 2011, 08:26:57 PM »
The company announced today that its subsidiary, Heilongjiang Lanxi Sunrise Linen Textile Industry Co., has received two awards at the China National Textile and Apparel Council Press Conference held on October 19th. The two awards were “Linen Textile Industry Top 10 Competitive Enterprises” and “Textile and Apparel Industry Top 500 Competitive Enterprises.” More signs that the company is doing great things and is becoming more established. It’s too bad their stock is down (most likely due to low liquidity), but they should produce an excellent third quarter.
 
Here is the link to the article:

http://markets.on.nytimes.com/research/stocks/news/press_release.asp?docTag=201110250800PR_NEWS_USPRX____CN92694&feedID=600&press_symbol=6704946

7
OTCBB Discussion / Re: Fantastic Buy of CTXIF
« on: October 21, 2011, 12:19:07 PM »
Just received an e-mail from their CFO in regards to the share repurchases. It seems that management used their own money to purchase the shares in the market. So disregard the section in my last post about the purchasing of shares by the company being unethical.

8
OTCBB Discussion / Re: Fantastic Buy of CTXIF
« on: October 20, 2011, 08:49:04 PM »
The company announced today that it has purchased (so far) 70,000 shares at an average price of 2.42. While this amount is still quite small it does give some confidence that the company is on the same side as shareholders. (Now we just need them to start paying a dividend!).

Now in my own personal opinion a share repurchase isn’t the best way to restore the market price of a stock for a few reasons. One is that by purchasing share in the open market any shareholder who sells is made to suffer as large a loss as possible, for the presumable benefit to those who hold on. Although this is a proper viewpoint to follow in purchasing other kinds of assets for the business, there is no inherent logic or ethical base for applying this idea to the acquisition of shares from a company’s own shareholders. Management SHOULD be more obligated to act fairly toward the sellers because the company itself is on the buying side.

The other qualm I have about this is that any money used to repurchased shares is money that could be distributed to shareholders as a dividend. A dividend would benefit all the shareholders as opposed to only those who keep their stock.

I still think the company is great, and I expect a great Q3 from them which should be published out in November.

9
OTCBB Discussion / Re: Fantastic Buy of CTXIF
« on: September 06, 2011, 10:00:20 PM »
China Linen announced today that they have hired Mr. Manuel Henares Arenas as Senior engineer and consultant to China Linen. This looks like a good sign as long as the potential gains from hiring Mr. Henares become apparent. Hopefully with Mr. Henares knowledge and skills he will decrease the company’s labour expenses while also improving the quality of the fabric that they produce. Higher quality fabric will lead to more expensive prices which will (hopefully) lead to more profits. While China Linen’s margins are above average, having better margins will increase profits, thus making the company’s ability to capitalize on its expansion goals much easier.

The full news announcement can be viewed at http://ir.stockpr.com/china-linen/company-news/detail/303/china-linen-textile-industry-ltd-announces-engagement-of-spanish-senior-engineer

10
OTCBB Discussion / Re: Fantastic Buy of CTXIF
« on: August 29, 2011, 02:18:26 PM »
China Linen announced today that they will be presenting at the Rodman & Renshaw Annual Global Investment Conference from September 11-13. This isn’t a huge article but the link is below.

http://ir.stockpr.com/china-linen/company-news/detail/293/china-linen-textile-industry-ltd-to-present-at-the-rodman-renshaw-annual-global-investment-conference-on-september-12th-at-3-15-pm-et

11
OTCBB Discussion / Re: Fantastic Buy of CTXIF
« on: August 15, 2011, 07:52:54 PM »
This morning China Linen Textile Industry LTD announced their Q2 results, which were amazing. To get a more complete picture on how they are doing for the year I am going to use the 6 months ended results.

Six months ended June 30, 2011:

Revenue increased approximately 81%! And this number is not just due to an increase in prices. They have made more money by selling more volume due to new customers and new products.

Gross Profit is up 115%! This is due to increases in sales prices and the ability to better control production costs from their takeover of the yarn spinning plant.

Operating Income up 106%!

Net income up 65% over the previous 6 months!

Diluted EPS of about $0.97. If the company continues this rate their EPS for the 2011 year should be very close to $2.00 a share, which is almost what the company is currently trading at. Furthermore, if the share price does not reach at least $5.32ish the conversion notes will most probably not be converted. If the notes do not get converted the EPS will be about $1.138 as the EPS will not be diluted. That would mean that by years end regular EPS should approximately equal what the stock is currently trading at. As an owner of the business if you bought in right now you would make your money back within about 1 year, which is an amazing feat.
 
Book Value per share equals approximately $5.55.

Working capital of about $4.22.

The company is still extremely undervalued and yet it continues to outperform many other companies as I will show below using EPS.

6 months (diluted) EPS/Current Market Price

China Linen Textile Industry LTD               $0.97/2.25
Lululemon Athletica                  $0.24(roughly)/57.88
Bombay Rayon (non-diluted and for the whole year)      $0.42/6.16 (converted roughly to USD)
Maxwell Industries LTD   (for the year)            $0.0016/0.50

CTXIF grossly undervalued even compared to companies in the same industry.

12
OTCBB Discussion / Re: Fantastic Buy of CTXIF
« on: August 08, 2011, 08:59:55 PM »
Hey everyone. Just a little update on CTXIF. They announced today that they will be holding a conference call and report Q2 on August 15 at 8:00 am ET. I am obviously very excited to see how the company has performed in Q2. I expect that during the Q&A there will be some questions regarding its low share price and what it intends to do about the risks with regards to the U.S debt crisis.

I have also been constantly e-mailing Scott Powell who is currently visiting their operations over in China, so any new news that I get from him shall get posted.

All in all it’s nice to see that CTXIF isn’t crashing with the rest of the market. This could be due to a number of reasons. 1. It currently is already at a very low level for what it is worth. 2. Investors who own the stock do not want to sell because they know it is worth more. 3. It is a somewhat unknown company.

I have been trying to get an updated B-1 form so I can see all those that own the stock, but for now check out this e-mail from Jodie (the companies CFO) which I have copied and pasted below.

Hi Justin,

I don’t think we file B-1 form as a foreign company. As far as I know, Creation International owns 40% our shares, CEDE & Co in New York 15%, 4% shell company, the rest are China/HK, Europe and US investors. We mainly have individual investors except institutional holders for convertible notes. Xiao is checking with our transfer agent, we will update you if we have new or different information.

Thanks,

Jodie

But I do urge everyone to check out the conference call on Monday and look over their most Q2 financial statements to see how undervalued this company is.

13
OTCBB Discussion / Re: Fantastic Buy of CTXIF
« on: July 24, 2011, 12:36:02 PM »
Hey everyone just thought I’d post a few things about CTXIF as I know that there is some concern that it isn’t a “real” company, as there have been a few Chinese companies that have turned out to be fraudulent or they have misstated things in their financial statements. But I assure you these guys are real lol.

I’ve been emailing the CFO Jodie Wehner and Scott Powell (who does some work for them) and asked them a few questions. And for anyone who doesn’t believe me feel free to contact me and I can forward you their responses. But here’s what I asked and what their answers were in a nutshell.

I asked them:

1.   What the company plans to do about its low share price?
2.   What does the company plan to do about the matter regarding the defamation of most Chinese companies and the scepticism the public may have on whether CTXIF is a “real” company or not.
3.   Who are its customers/end users? (For some reason I had a tough time finding this but I think I just accidently skipped over it somewhere)
4.   Why is the accounts receivable and inventory so high from the last fiscal quarter? Is that a concern for shareholders?
5.   Do you have any information that would lead investors to believe that you are a legitimate company? (Ya I actually asked them that. A little rude and a little obnoxious I know I didn’t mean for it to come across that way. Just trying to be safe!)
6.   What their affiliation is/was with Global Hunter Securities.

Here were there responses:

Scott:

The company is always reviewing methods to increase shareholder value and take actions that also make sound business sense. If the company decides to take actions such as paying a dividend, etc., it will be announced via a press release.

I have not heard the rumours you are referring to but please remember this is a former state owned company. I and other colleagues of mine have also visited their facilities near Harbin.
Some of the end users are Hugo Boss, Marks & Spenser, H&M, etc. (There are many others as well, such as Zara, Orion, and Laurus Miani, who are pretty big players).

Jodie:

No problem. Thank you for your interest. We disclose our top customers' information in the Management Discussion section of our Qs and Ks. Our DSO improved from 107 days in 2010 to 81 days in 1Q, which is not bad in Chinese companies. We did increase our inventory in the 1Q as we strategically purchased more raw materials in anticipation of price increase and higher sales order. We'd explained that clearly in the 1Q call and PR (how did I miss that?! – that’s me talking to myself btw). Global Hunter Securities does not currently cover our company. We focus on our business to deliver good results for investors and welcome all our investors to visit our operation in China.

There you have it. I mean yes they could be outright lying to me, but I really doubt that is the case. Anyway, I still stand firmly behind this company and I think they will make their shareholders a lot of money. Good luck everyone! And if anyone has any questions feel free to ask!

14
General Discussion / The Absurdity of Modern Portfolio Theory
« on: July 20, 2011, 09:50:16 PM »
MPT – Strike 1: Investors Are Rational

A friend of mine told me that I should look at the Modern Portfolio Theory (MPT) for some ideas on what to write about. Boy was he right. But first, what is MPT?

MPT is a theory of investment which attempts to maximize a portfolio’s expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. It is also a form of diversification (and you know how I feel about that (if not read my post on diversification)).

MPT is best explained by using a mathematical model, which, in my own opinion, is a bunch of baloney. The only mathematics you need to evaluate companies or stocks is simple adding, subtracting, multiplication and division. That’s it. Now the model works in theory, but in the real world, where there are no save points, it doesn’t even come close to working. This is due to the FACT that it makes a few very grave assumptions. So part one of our journey through the pitfalls of MPT starts now with the assumption that………….

INVESTORS ARRRRRRRE RATIONAL

One of the assumptions that enables MPT to work (in theory) is that investors are rational. I find great difficulty in believing this to be true due to the simple fact that investors are not any different from other people. Investors are people; plain and simple. Now how many people do you know who are completely rational? Take a few pauses here to really think about that……………keep thinking……….




Probably not that many right? And that is because the majority of people (please do not take offense here) are too emotionally driven to be rational. I know you’re not though. :)

So now how can investors be rational? Are they some sort of superior being that has evolved to totally abide by the rules of logic and circumstance and admonish most, if not all, of their emotionally weak mindset? Of course not. The majority of investors are not rational. They can be greedy, overzealous, and sometimes frightened when their favourite stock takes a plunge.
As an example let’s look back a few years at some irrational investors who were buying technology stocks. And remember any smart individual (who knows at least a little accounting) could see that the majority of “tech” stocks were grossly overvalued at this time, even though they were very popular.

1.   In 1999, Alexander Cheung of (what once was) Monument Internet Fund, after earning 117.3% in the first 5 months of the year, claimed that his fund would gain 50% over the next three to five years and would achieve an annual average of 35% over the next twenty years.  Now is he rational? Well, considering most of the fund’s portfolio was comprised of internet stocks which were grossly overvalued, I’d say no he isn’t rational. He got caught up in the market mayhem of internet stocks. Another point to look at is that the highest 20 year return for any mutual fund in history was about 25.8% per year (performed by the great Peter Lynch). Peter’s performance during that period turned $10,000 into more than $982,000, and yet Cheung was saying that he could turn it into over $4,000,000! Obviously that is ridiculously overoptimistic. And here is the point….investors bought it. These “rational” investors threw more than $100,000,000 into Cheungs fund over the next year. By the end of 2002, that $100,000,000 was worth about $20,000,000. A loss of 80%.

2.   Alberto Vilar of Amerindo Technology Fund, after a whopping 249% return for 1999, ridiculed anyone who doubted that the internet was a perpetual money making machine: “If you’re out of this sector, you’re going to underperform. You’re in a horse and buggy, and I’m in a Porsche (personally I loled there). Clearly Mr. Vilar was not rational in saying this, as the backbone of the economy at the time was the brick and mortar companies (companies with tangible assets). So clearly this investor, who ran a multimillion dollar mutual fund, is not rational. To showcase this, if you had invested $10,000 at the end of 1999 you would have about $1,195 left by the end of 2002. Makes you sick doesn’t it?

3.   James J. Cramer, a hedge fund manager, proclaimed in 2000 that Internet-related companies “are the only ones worth owning right now.” These “winners of the new world are the only ones that are going higher consistently in good days and bad.” Oh man. As with the above examples, he isn’t looking at what these companies are worth. He is looking at the price of the stock. Sorry James, you’re being branded as irrational. By year end 2002, one of the 10 companies in the fund went bankrupt, and a $10,000 investment would have shrunk to about $597.44. That is freaking scary. I’m not sure which new world James was referring to here….oh wait, an irrational world, where people pay for overvalued stocks that won’t make them any money.

The majority of investors are obviously not rational and as long as people are guided by their emotions they never will be.
Strike one MPT. Swing and a miss. The first assumption that investors are rational does not stand up for modern portfolio theory to work. 

MPT – Strike 2: Markets Are Efficient

Ready for the next blunder that Modern Portfolio Theory assumes? Are you?!?! Well get ready for the next big assumption that MPT makes which is……………………………

MARKETS ARRRRRRRE EFFICIENT

What this means in that in order for MPT to work the model assumes that markets are efficient, meaning (more or less) that at any given time the price of a stock reflects what a company is worth based on all readily available public information and that prices instantly change to reflect new public information. In very simple terms efficient markets are saying that the market is a weighing machine. Stock prices accurately reflect, at any given moment, what a company is worth.

What all investors need to understand is that the market is only a weighing machine (and only sometimes) in the long run. In the short run, it is a voting machine, and a poor voting machine at that. There will be all sorts of price discrepancies in the short run due to, overconfidence, overreaction, representative bias, information bias, and various other predictable human errors in reasoning and information processing.

And if markets were efficient there would be very little money to be made, as companies would never become undervalued nor overvalued. Furthermore there would be zero arbitrage opportunities (taking advantage of a price difference between two or more markets). But let’s look at some examples of a few market inefficiencies.

1.   The 2000 – 2002 financial crisis. Things were going so well in the stock market before 2000. The market was reaching new highs and people were making money. But of course we know that the market was grossly overvalued at this point. By believing in this idea that markets are efficient, financial leaders were inconsiderate to the chronic underestimation of the dangers of asset bubbles breaking. This inevitably led to one of our great recessions as the market corrected itself.

2.   Lululemon at its current price of around $60 is disgustingly overvalued. It is currently trading at over 60X what it is earning. Meaning that for every dollar you put into it you will earn, as an owner of the business (in theory), less than two cents on that dollar. Even its price to book ratio is huge at about 20X, meaning that even if the company liquidated for every dollar that you put into it right now you would only get back about five cents! Now don’t get me wrong Lululemon is an amazing company, but the current price that some people are buying into it at right now is extremely overvalued. Its prospects and growth don’t even justify a price this high! Even the average price to earnings ratio for the industry is only about 27X!! So even if we use this average (although this is still very overvalued) it should be trading at about $25. But in my opinion that is still too high. $15 or $20 would be more understandable. There is no safety of principle with Lululemon at its current price, and if the market were efficient, the price of Lululemons stock would be much lower. (Please note that when I originally wrote this Lulu was trading at about $120, however recently they did a stock split so the share price is halved. The ratios are the same however.

3.   China Linen Textile Industry at its current price of around 2.25 is disgustingly UNDERvalued. The company sells linen and yarn in China, and has both excellent management and fantastic prospects. What is more interesting to note is that it should be trading at about $18.00 based on some calculations that I have done (see my analysis on CTXIF for a plethora of information). Its current EPS for the first quarter of 2011 was a whopping $0.46! We can also safely assume that this number will continue in subsequent quarters, as their business is not cyclical or seasonal, meaning they should finish the year with an EPS of about 1.84. That means the P/E ratio is only 1.2X! This means that if you were to buy today you would make back (as an owner) more than half of your initial investment in one year. Furthermore, the company is poised for growth, as it plans to take over other companies in the surrounding area, and also receives some unique help from the Chinese government (again, see my analysis on CTXIF). So why the price discrepancy? Who knows?! The point here is that the market is not efficient. If it were, this company would be trading at a price much higher than what it is currently trading at.

So there are three examples on how the market is not efficient. Obviously we would need only one to disprove this assumption, but three really drives the point home. And of course there are many other examples out there, but we’ll stick with these ones for now.
Strike two MPT. The second assumption that the market is efficient does not stand up for modern portfolio theory to work.
“Here batter batter! Swing batter batter!”

MPT – Strike Three: Investing Is A Trade-Off Between Risk And Expected Return

Now here is where I start to get a little frustrated. You might even say that I get a little pissed off. This is less of an assumption of MPT but rather a STATEMENT that really brings the whole structure of what the model intends to do to its knees. The statement proposed by MPT is that……………..

 INVESTING ISSSS A TRADE-OFF BETWEEN RISK AANNDD EXPECTEDDD REEETUUUURNN

It is saying that the higher the risk, the higher return. Remember when you were a little kid watching cartoons and when the characters got so angry that steam came out their ears? That’s me when I read that statement.

That statement is so far from the truth that I find it appalling that institutional investors actually say that. Investing is NOT a trade-off between risk and expected return. In fact the opposite is true. Stocks and portfolios with lower risk tend to provide higher returns than stocks and portfolios that carry higher risk. And if any investor or financial advisor tells you anything different, do not give them a single penny! Just stand up, and politely leave. They have no idea what they are talking about.

Furthermore, let’s clear up what risk is defined as in the stock market. “Risk is based on the amount of research one is willing to put into ones portfolio.” And, ultimately, the higher the price paid for a stock, the higher the risk. Investors who gamble in the stock market are not investors; they are gamblers. So please do not confuse risk in the stock market with anything else that is outside of what I have just stated.

I would also like to point out here what the actual definition of investing is: “Investing is allocating capital into an operation that provides a safety of principle (your money) while providing an adequate return.”

But let’s get back to the point. Let’s look at how this statement is far from true, and how MPT is seriously flawed in stating this.
It is actually very easy to prove how this point is flawed. All I would need to look at is the fund with the lowest possible risk and compare it with ANY other fund that offered even slightly higher risk (which would be all of them). It has been shown that over any large time period, lower risk funds actually produce greater gains than higher risk funds. The lowest risk funds in history are the index funds; the S&P 500, the DJIA, the Nasdaq, and the rest. Unsurprisingly, they outperform the vast majority of high risk funds over any large time period (5-10 years).

Taking large time periods into account, lower risk mutual funds only return (on average) between 2.5% and 3.7% annually, with the higher risk portfolios generating only 0.2% per year! If we even take a look at the performance of mutual funds just over the last year we find that the average return was only about 1%! If anyone can show me a high risk fund that has outperformed the market over a 10 year span I would love to hear from you.

So when does the higher risk pay off? I mean, with higher risk there should eventually be higher reward right? Well, obviously not. There can be the POTENTIAL for higher returns with higher risk in the short run, but nothing more. Even saying this we would be speculating a great deal, as some investors have a vastly different definition of risk than what we should use (other financial institutions assign a level of risk based on the standard deviation of the historical returns or average returns of a specific investment).

But, I guess the statement isn’t totally untrue. There is a trade-off between risk and expected return, but in the opposite way that you would think. Lower risk will often produce higher returns. But the statement that MPT assumes to be true is false. So again, there is evidence to dismiss the modern portfolio theory.

 â€œStrike three! Yerrr ooutttt!”

MPT – Conclusion

MPT is a seriously flawed model based on a few large assumptions that are not necessarily true. Investors are not rational, the market is not efficient, and investing is NOT a trade-off between risk and expected return, where higher risks are associated with higher returns.

It is a mathematical model used by the majority of financial institutions to justify some of the absurd investments they invest in (and try to get others to invest in) and the investment strategies that they use. The only true way to invest is by using a value oriented approach to investing.

However I must give thanks to the modern portfolio theory, as it has increased the amount of mistakes that the financial industry makes, and may have been a cause of the recession in 2008. So why am I thanking people who use MPT? Because it creates excellent buying opportunities for people like me. Stocks were so cheap at that time you could have bought into almost any company at a discount. And that is how a real investor makes money, by buying into something that provides a margin of safety.

I hope you all enjoyed my take on modern portfolio theory and I strongly encourage everyone to check out my newest stock pick China Linen Textile Industry LTD. And feel free to follow me on twitter at JustinG101!

15
OTCBB Discussion / Fantastic Buy of CTXIF
« on: July 19, 2011, 12:14:05 AM »
So today we are looking at a company called China Linen Textile Industry LTD (CTXIF). China Linen Textile Industry, Ltd. China Linen Textile Industry LTD is principally engaged in the production and sale of linen yarn and various types of linen fabric. The Company is also involved in consultation and R&D related to linen technology and linen products. The Company carries on all of its business activities through its subsidiary, Heilongjiang (try saying that 10 times fast) Lanxi Sunrise Linen Textile Industry Co., Ltd. ("Lanxi Sunrise"), near Harbin City in China. So this basically means that China Linen Textile Industry LTD is a holding company.

This company is doing a lot of great things, and here are a few reasons why you should buy into this company (and hopefully make an excellent return). Oh and brace yourself, this is going to be a long one but a good one.

Reasons to Buy

1.   It Is Undervalued:
Using an intrinsic value formula we find that the company should be trading at approximately 20.33ish (for those of you who do not know the intrinsic value formula you are more than welcome to look it up, just search Benjamin Graham). Its book value is approximately 5.02, which is also more than double what the stock is trading at (right now about 2.25), and is also about double what the industry average is for book value. Furthermore, when looking at their latest financials it can be seen that their current  EPS (diluted of course) is approximately 0.44 (the value I have shown here is slightly different than their stated value of 0.46, as I do not believe government subsidies should be included as actual earnings). This is also only for 1 quarter! If we multiply this by 4 quarters we would have earnings of about 1.76! It is fairly safe to assume this as their revenue streams are not cyclical in nature (read financial statements) so each quarter’s earnings should be roughly the same. However it should be pointed out that this may not necessarily be true as it is possible that unforeseen circumstances may arise (earthquake, politics, regulations etc.).

 This means that the company is only trading at about 1.3X earnings. When we look at the textile industry as a whole the average P/E ratio is about 25.5X. If we use that number as an average CTXIF should be trading at just under $45. Now that is a little overpriced in my opinion, but it’s good to know. A more appropriate valuation of where it should be trading at would be 10X earnings ($17.6). We can also look at CTXIFs net profit margin (2010) which is well above the industry average of 3.2% at approximately 17.6%, which is huge for the industry. I’ll explain why I think this is so further down.

On a side note, it should also be noted that during their 2010 year they were operating at full capacity and couldn’t actually take on any more orders (even when operating 24 hours a day). They also did not utilize their fabric subcontracting revenue stream to generate revenue. Once the company expands (as it has due to the purchase of a yarn spinning operation) and if it were to utilize the additional subcontracting revenue stream, their EPS would be much higher. We’ll keep it conservative for now though.

2.   Key Relationships:
CTXIF has a few relationships that give it some particularly great advantages over its competitors. One is that some of the companies that it imports raw materials from and exports it’s finished goods (Harbin Zhongyi and Harbin Sunshine) have special licenses granted to them by the PRC (Peoples Republic of China) which allow them to take advantage of special waivers on import/export taxes in areas of northeast China (where CTXIF does some of its business).  Now this may not seem that big of a deal except that the company's CEO, Gao Ren, owns these companies. Hmmmm how convenient lol! So CTXIF pays almost no mark-up for any imports and exports. This is one reason why CTXIFs costs are minimized and it has a high profit margin.

The company is also considered to be a leading manufacture enterprise by the local government, Lanxi Government ("Lanxi Government"), which has a long-term desire to encourage Lanxi Sunrise to expand its production capacity and to create more job opportunities for local residents. For that purpose, the local government has granted various subsidies to Lanxi Sunrise. These subsidies offset over 40% of its income taxes and also cover some of its land, building, and sewage facilities improvement costs. This is another reason why their costs are low, as they are reimbursed for a number of them.

The company has also partnered with Tianjin Institute of Technology and Donghua University in order to research more cost effective ways to produce linen and yarn. Furthermore, the company’s subsidiary Lanxi Sunrise is building the first and only linen research and development center in China. Should this be completed AND the research pays off in the form of decreased costs (or some other discovery) the company should be more profitable.

On the customer side of things, the company has diversified its customer group over the past year to not have such a high threat from buyers. 2 years ago 90% of the company’s revenue was generated by its 5 largest customers. Its five largest customers now only account for about 47%, which means a decreased threat from buyers. The risks of not having buyers are greatly minimized as the company has entered into many long term contracts with them. This was outlined as a concern that management was looking at, and they are obviously trying to fix it.

3.   Excellent Management:
The companies CEO is doing great things and is delivering on all of his promises. He has said that the company is looking to expand, which they did by purchasing a company that produces yarn, and is continually looking for more acquisitions to increase its percentage of the market. The company is also looking to expand into India and Turkey as well as produce more high quality yarns and linens. I guess we’ll see how they perform! The CEO has also been recognised as the “National Entrepreneur with Honesty in Business”, “China Enterprise New Man of the Year”, “Entrepreneur with Honesty in China Textile Industry Business” and “Model Worker of National Textile Industry.” Management is also very good at using their invested capital, as in 2010 they achieved an ROIC (return on invested capital) of about 6%. This is a decent return (this is not an ROI, but somewhat similar).

The only downside to management is that they currently have poor internal controls and have limited accounting personnel. This is minor though, as any changes that needed to be made to their financial reports are dealt with swiftly, which leads back to how honest management is.

4.   Other Advantages:
While CTXIF has a lot of competition, many of them only produce thread and currently do not have the capability to produce fabric. Due to this the company is one of the largest manufacturers of linen cloth in China. In addition the company’s operating facility operates 24 hours a day, in which workers work for three eight hour shifts! That is pretty insane considering they were operating at full capacity in 2010. If only there were 25 hours…

Risks:

The risks that potentially face the company are minor and many of which are not expected to happen. Some of these are a change in customer demand, a change in government policy, and the risks associated with managing rapid growth. The one major concern that I think would be the most likely to become apparent is the managing of rapid growth. The company is growing very quickly, with EPS growing over 12% over the past few years, as well as very large increases in assets and acquisitions of companies. I do believe that Gao Ren and the rest of the management team will prevail in this area though.

There are also a few risks to the shareholders in regards to the company. It may difficult to file any lawsuits against them as their main operations are in China. Currently I don’t see any reason to file a lawsuit, and I think this risk is greatly minimized by the CEO, as he seems like an honest and trustworthy man. Gao Ren does own about 40% of the company though, which can either be a curse, if he messes around, or a blessing, as his stocks are worthless if the company doesn’t perform. The company is also incorporated in the Cayman Islands, which means that it may be difficult for shareholders to protect their interests if the actions of management cause concern.

Conclusion:

The company is a great buy at its current price of 2.20ish (and in my own personal opinion it is still a great buy anywhere under $15). It has growing EPS, it is undervalued by a substantial amount, it utilizes key relationships very well and it has excellent and honest management. I believe that this company is worth about $18 based on a combined look at its EPS, its intrinsic value, its book value and the strength of its management. I also believe this is a little conservative because if we look at its growth potential and how it stands relative to the industry as a whole it could be worth closer to $45 maximum (as of right now), and it is far out-performing the industry average. The company is also looking to grow and expand its business, which could lead to higher earnings in the future, and thus a higher share price.

Now I know that these numbers are much larger than what it is trading at, so if you don’t believe me then check out CTXIF for yourself.:)

http://www.chinalinentextile.com/

And please feel free to follow me on Twitter! JustinG101

Pages: [1] 2