Weekend Ramblings

Lots to talk about. First off, the big question regarding the markets is whether we've seen the bottom of the correction last week. When I look at the basket of indicators I use to time the market on an IT basis, I would say that we just barely made the threshold of satisfying the criteria needed to market the bottom. For instance, we saw a ratio of 1.7 bears to bulls in AAII that week. That's a lot of bears but a more ideal reading would have been 2:1. As low as 25% of stocks in the SPX trading were above their 50DMA last week. That's oversold but a more ideal reading would have been 20% or lower. The rydex ratio has been rapidly rising but again, it would have been more ideal for a larger rise. Meanwhile,  NAAIM and fund flows haven't shown the capitulation to even quality as a bare minimum bottom requirement. If we got some sort of retest or a sharp pullback towards the lows I think it would probably build a better foundation for a lasting bottom, but we have seen time and time again the market do these "V" bottoms and if you waited for everything to be just perfect, you miss the rally and you'd be forced to chase, or worse, get killed if you went short. At the very least though, we should be in a for mild pullback and I might just very well play that, if for anything, to hedge my long exposure a bit.

I gotta tell you though, I'm sick of having to worry about what the broad market is doing. It's much more enjoyable to uncover and learn about individual stocks and making money being a stock picker. In the past I've done a pretty good job of uncovering winning stocks that have not been correlated with the day to day moves and have been able to have big moves to the upside at times when the markets have been shitty, but I still can't help but worry about what the markets do when I'm in these stocks especially when I'm in big. As a matter of prudence, I think I need to have at least a small hedge in place at times when I think the market could be in for a significant pullback for one can never know for sure if a pullback will turn out to be something worse and your "market resistant" stock succumbs to a market vortex of pain.

I've been doing more DD on this little Chinese company I've been talking about lately and man, do I like what I see and as result I've been quietly buying more shares at a dirt cheap price.. I met with one of the directors and he gave me some tidbits of useful information (all legal of course). Just last week the company announced a significant addition to their farmland leases, which if you crunch the numbers suggests that they could earn about $14-$15 million in profit for 2013. Right now the market cap of the company (fully diluted) is $15.5 million! This is absolutely fucking ridiculous especially with how clean the balance sheet it. I know what your thinking... it's too good to be true right? This has been my suspicion as well, but as far I can tell, the company is legit and there's no hidden liabilities or anything like that. I voiced my concerns to the director I met with about the validity of the company's assets and he told me he actually flew over to China a year ago to check out their operations and he had the auditors (who are Canadian) verify their bank statements at the branch and head office level and everything checked out.

So, why  is this stock asininely dirt cheap? I think there's a few reasons why. One reason is the Sino Forrest effect which I talked about before. I discovered another reason - 2 groups of disgruntled minority shareholders. One of them is an underwriter that took the company public who still has shares on their books which they no longer care to hold (they were probably hoping to unloaded them shortly after the IPO). Another group of shareholders who want out are some Chinese investors that have been with the company from earlier days and were not keen on taking the company public nor do they probably understand stock markets in general. So, these guys are willing to sell at current prices because they will still have probably made a profit given that they got in near the beginning when the company was only a fraction of the size it is now. To put things in perspective, the company earned $1 Million in 2007 and by the end of this year they are poised to earn about $10 Million.

The wheels are in motion to clean out these disgruntled shareholders putting the shares into strong hands. Once that happens then the stock will be clear for take off as there will be very few sellers at this ridiculous price. I've been doing my part taking shares from these morons who are just giving away the stock. I've seen the disgruntled shareholder effect before. With hwo early this year, some guy blew out about 1 Million shares between $1-$1.20 right at the bottom. At that time I was shaking my head saying "how the fuck can someone be willing to dump so cheap given how well the company has been doing?" I was also worried. I was wondering "what am I missing here?" "Does this guy know something I don't?" So, I did something I rarely do because it goes against my rules. I averaged down because the stock was simply too cheap and after giving it some thought I believed that I wasn't in fact missing anything and that this seller was probably some old shareholder who for one reason or another decided to blow out a large position. I was right. After this guy was done puking his position,  it marked the bottom of the price and the stock more than doubled from that low a few months later.

I have never seen a better risk/reward opportunity EVER! Hands down, this company is the cheapest of all time. Here you have company that has been exhibiting solid, steady growth. In 2010 they earned $7.7 Million, in 2011 $8.9 Million. They will probably earn $10-$11 Million in 2012 and next year they will earn about $14-15 Million given recent land acquisitions. They have a rock solid balance sheet, trivial debt levels, gushing cash flows and a recession resistant business given their business of selling canned fruits and fresh produce. So, despite all these great fundamentals,  the company trades at just over 1 times forward earnings and less than 50% of book value! Well, either this company is fraud and I'll get burned or I'm gonna be right and make big money on this stock....there's no in between because it's pretty much impossible for the company to be valued so low longer term if the company is kosher and they keep producing the way they have been.

There's more I wanted to talk about but I'm getting tired....I'll save it for another post.