Opportunities In Out-of-favour Stocks

You may be absolutely right, Harlequin. The following 3 very simplistic indicators also tend to support such a move:
 
1.       TECHNICAL PICTURE – Since the STI hit the bottom in March 2009, the STI had been rising to higher “highs” from that time till now. Similarly, the “lows” of the STI were also moving to higher “lows”.
2.       FUNDAMENTALS – The profits & businesses of many stocks that were adversely affected by the economic downturn and the bearish market are recovering with some achieving rather impressive performance. A good example was S-chip, SUNVIC CHEMICAL, Nett Profits for FY 07 & 08 were RMB 90M & RMB 120M. Profits took a big dive to RMB 4M in FY 09 but recovered to RMB 156M for the first half of FY 2010. Stocks often become undervalued and cheap, on any strong earnings recovery, pressuring their share price to move up.
3.       BEHAVOURIAL/PSYCHOLOGICAL PICTURE – Most market participants are still rather cautious of putting too much money in stocks and many remained too scared of S-chips or penny stocks after having got their fingers badly burnt the last round. In every bull market, the fear of losing money would eventually be transformed to fear of missing out on opportunities to make money, and then to greed of making a few cents more (or money not enough). With the fear of a double dip dissipating, it would appear logical for the market to go nowhere but up so as to complete the current bull cycle before another bear market (possibly another crisis) sets in.

Nextinsight featured an article on 14 October 2010 on “China Gaoxian, Biosensors: What Analyst Say Now..”
Interestingly, CHINA GAOXIAN is another out-of-favour stock but from the “chemical fibre and textile sector”.  In its 2Q 2010 Results, China Gaoxian stated that according to the National Bureau of Statistics of China, the overall profit for the chemical fibre manufacturing sector jumped by 1,3 times YoY in the first 6 months of 2010 riding on the robust growth of China’s domestic economy; & that the textile industry had experienced a continual pickup in the first 2 quarters of this year in term of business climate index. It predicted an expanded result for 3Q10.
For the first half of this year, many stocks in the sector have shown good recovery of profits. Since their stock prices generally continue to remain at rather depressed level, the price upside would appear very favourable especially if the stock market continues to recover to much higher level.
China Gaoxian is apparently the “best choice” or “the leader” of the chemical fibre & textile stocks in terms of fundamentals or valuation consideration. According to UOBKH, China Gaoxian is severely undervalued compared to its peers.
The selling pressure on Gaoxian is apparently not over yet as the stock is still languishing at around 19 cts, just 4 cts above its historic low.  QUESTION: Could this then be a golden opportunity to get into a “potential good Winner”?  The answer would depend much on each individual risk appetite and astuteness.
Below are some relevant points that may be worth taking into consideration -

1. As at 30 June 2010, Gaoxian has annual production capacity of 180,000 metric tons in premium differentiated fine polyester yarns and 40,000 metric tons in Warp Knit Fabric (WKF). In December 2009, it purchased 60 sets of machines for manufacturing differentiated polyester yarns so as to raise its production capacity by 16.7% to about 210,000 metric tons from 3Q10. Gaoxian also purchased 100 sets of new WKF machines for RMB 171.5M to boost the WKF production capacity by 3.8 fold from 17,000 tons to 81,000 metric tons by December 2010. The first 20 sets had already been installed and contributing to production in 1H10. Another 30 sets will commence operation in 3Q10 and the balance 50 sets in 4Q10.With the additional production capacity coming on stream, Gaoxian can be expected to report better q-o-q earnings over the next 3 quarters beginning from November 2010 (provided the business in the sector does not go into a downturn).
2. Gaoxian’s share price may get a boost (hopefully) if its dual listing in Korea is successful.
3. At 19 cts, the downside to its share price is 4 cts (at most) to its historic low of 15 cts, unless business in the sector goes into a downturn.
4. Upside potential gain of 10 cts (UOBKH’s TP is 29 cts) or considerably more, if STI makes further recovery or more investors regain their confidence in S-chips.

Eratat Lifestyle, a penny stock, has just released its Q2 results with a doubling of nett profit to RMB 44.1 million. Its EPS for the quarter is 10.6 cts(RMB) [2 cts(S)]. Its 6 months EPS is 17.6 cts(RMB) [3.36 cts(S)] or annualized EPS of 6.7 cts(S). PE of 3x at 20 cts.
With S-chips being generally out-of-favour with most investors, Eratat’s share price has been fluctuating between a range of 12 to 20 cts since February this year with its PE of under 4x. The latest results would further depress its low valuation & enhance its attractiveness to potential investors.
QUESTION: Is this stock really presenting a golden investment opportunity especially to those who are not averse to investing in out-of-favour stock, notably S-chips?
Investment entails managing risks, taking into account the various risks factors vs the potential rewards. Each individual must do his/her homework before parting with his/her money for any investment.
The following pointers may be useful to those interested in taking a position in the stock:

1. Unlike China Sports & China Hongxing, Eratat has successfully repositioned itself as a casual lifestyle brand instead of a sportswear brand. This has enable it to recover its profitability readily and be in a better position to increase its products selling price in the face of escalating raw materials and labour costs.
2. Eratat is among the better ones of the S-chips [not all S-chips are rotten] in terms corporate governance and profitability. It has “Cash & Cash Equivalents” of RMB 131 million and no borrowings & has declared dividends for the past 2 years.
3. Eratat announced recently that it had secured confirmed orders of footwear & apparel amounting to RMB 477 million for delivery from Jan to Jun 2011. This is 23% higher than the previous period. In addition, the Average Selling Price (ASP) of both items has also increase -Footwear from RMB 72 to RMB 90 – up RMB 18 or 25% and Apparel from RMB 58 to RMB 80 – up RMB 22 or 38%. This is expected to translate into improved revenue and nett profits for Jan-Mar 2011 & Apr-Jun 2011 quarters

4.   Based on stocks with similar fundamentals in past bull markets, Eratat can be expected to have very limited downside at its current share price and a high probability of achieving a doubling in its share price in a bull market subject to the absence of any unexpected market crisis or economic recession.

Agree on Eratat. Good stock , cheap stock, operating in cut-throat business environment.

Due credit must be given to Eratat’s management for taking positive measures to survive in the cut-throat business environment. As a result, Eratat was least affected by the business downturn in sportswear compared to China Hongxing & China Sports. By successfully repositioning itself as a casual lifestyle brand instead of a sportswear brand, Eratat would now be able to stand up well to any competition through its increasing ability to price its house brand products and carve out a niche for itself.
Eratat has the most attractive stock valuation among the sportswear stocks and its share price may be expected to outperform the others in the near term.
 

Should be trading at 60c instead of 20c!