Dont' forget to comment!

By the way, If you happen to read any of the writings, please do comment. You perhaps don't know how much pleasure it brings to get to know that someone is reading my work. Please do find time to let me know of elements that helped you as well as those that proved to be disastrous. All criticism and suggestions are warmly welcomed.

Friday, January 17, 2014

Investing Performance for 2013

2013 can be described as the year of the comeback after two very lean and very poor years, it is mostly due to the high concentration of almost 30% of my holdings in one specific company. It is also a year when I decided to get back to the basics, finding undervalued companies that have attractive growth characteristics.

As I look back at the year, the broad rally experienced by stocks in 2013 is fundamentally attributable to the quantitative easing measures by the Federal Reserve in the US and a slight improvement of the global economic environment.

My biggest position was certainly Skystar Bio-Pharmaceutical Company. At the end of 2010, an accounting scandal of incredible proportions was affecting the sphere of chinese reverse merger companies. Investors were relentlessly dumping their share holdings on the market and all companies related to china saw their share prices prices fall over 70%. I was lucky enough to have found this falling knife right before it hit the ground. Nothing much happened until the end of August when the stock started posting incredible gains. I decided that taking some profits off the able was warranted and sold 75% of my position on October 10th 2013 after the stock had gained over 200% for the year. This proved to be a wise decision because prices came back down to more reasonable levels.

There are also a few blunders to mention. As the price of gold was rising and mounting fears of inflation, I decided to take a long position in shares of Osisko Mining Corp, this proved to be a poor decision because gold prices have only kept coming down since then. Even the recent opportunistic bid by Goldcorp does nothing to get the price back up to my original entry price.

Here are my positions for the year:


Taking those positions into account, my performance in 2013 was an incredible 114.4%, and the S&P/TSX did 9.6%, so it makes it that I over-performed it by 104.8%. This is very encouraging but I remain cautious, this performance might be due a great deal to chance and it is very improbable that I will be able to replicate it in the future. The downside is that even if I showcased a better performance than this index, it will get harder in the coming year to find such attractive opportunities and repeat a relative performance of this magnitude.

Friday, September 27, 2013

SKBI Is Inching Closer to Fair Value

As expected, the market is slowly starting to recognize the true value of SKBI. The details of the calculation of the true value of the company can be found in this previous article:

What has happened over the past couple of weeks had been a gradual adjustment of the P/E ratio of the company by investors to bring it more in line with the rest of the industry.

From now on the real treats will start after every quarterly release. After each of them, the company will announce that more of their factories are operational. 

The biggest kicker will happen when the vaccines factory start producing as well.

 As seen in their previous earning releases  vaccines have the highest operating margin among all the products manufactured by the company.

Since I published my analysis on the company, the stock went down. It has recently come back with a vengeance and is up over 100% since the April 2012 recommendation. As you can see in the table below, the stock still has a lot of room for growth in the future.

Feel free to let me know what you think about SKBI.

Disclosure: The author has a long position in SKBI.

Tuesday, October 16, 2012

To Board Of American Lorain Corp: Reject The CEO's Offer

Back in April 2012, I wrote an article about what I thought was an estimate of the value of American Lorain Corp. (ALN) , the initial results were for a range going from 8.44$ to as high as 32.53$. Since then I revised down my estimate of the value of the company and I will elaborate on this point later.
First, let's examine some worrying facts. On October 15th Mr. Si Chen, chairman and CEO of American Lorain Corp submitted "a preliminary, non-binding proposal letter", in which he publicized his intention "to acquire all of the outstanding ordinary shares of the Company not currently owned by Mr. Chen at a proposed price of $1.6 per ordinary share, in cash, subject to certain conditions. Mr. Chen currently beneficially owns, in the aggregate, approximately 46.5% of the Company's outstanding ordinary shares."
A very disturbing fact about this proposal is that the independent committee that has been set up to analyze it, composed of Mr. Dekai Yin, Mr. Tad M. Ballantyne and Mr. Maoquan Wei; Mr. Yin as its chairman, is far from independent. In fact the independent committee held no shares in the company as of their last Form 3 filings according to the SEC, how can they related to the other shareholders of the company who have no influence on the company?
For the shareholders who have not read it, the official proposal letter can be found here. The Board will have to enter a delicate exercise to make sure they extract fair value for the remaining shareholders and that they do not unfairly disadvantage the shareholders other than Mr. Chen.
Using pretty much the same format used in my previous article, let's see how much this offer is ridiculously low compared to the current intrinsic value of American Lorain Corp.
Assuming the current P/E ratio of 2.31, the current price assumes that the undiscounted earnings of American Lorain will grow by a little over 3% over the next 5 years, giving us a 2017 price of 1.60$, so the assumed figure of the CEO's proposal is actually lower. Public information tells us that earnings have been growing at about 24.8% a year over the past 7 years. Let's make another assumption that American Lorain is only able to grow EPS at 10% per annum. We find ourselves with a 2017 price of 2.35$ per share with the current P/E ratio. According to Reuters, the industry's average P/E stands at 34, but even with a ratio of 10 in 2017, American Lorain would be worth around 10$ per share.
From another standpoint, American Lorain has managed to grow its book value per share over the past 7 years at an average rate of 35% per year. Assuming the pace slows down to 20% as the company gets bigger, we end up with a book value of 13.58$ per share in 2017. If we use the current incredibly depressed Price/Book ratio of 0.26, we end up with a price per share of 3.53$. If we compare once again to the industry, we see that the average Price/Book ratio is close to 5. Using an alarmingly conservative Price/Book ratio of 1 for the year 2017, we obtain a value of 28$ per share.
Finally, as of June 30th 2012, the book value of the company amounted to 4.79$ per share, which is a 245% premium over the closing price as of October 15th 2012, or a 316% premium over the referenced October 8th closing price. The Board therefore should categorically reject the offer. Accepting the offer would be a blatant case of conflict of interest and negligence of the right of shareholders that are not insiders. Mr. Chen must have insulting levels of chutzpah to try to acquire a company he knows currently incredibly undervalued.
(click to enlarge)
In my opinion, if they intend to accept the offer, the Board could still give at most a 30% discount to Mr. Chen and offer shareholders a meager 3.35$ per share, this would be less insolent. His attempt is clearly an insult to the intelligence of the company's shareholders. I still err on the side of the book value of the company as a starting offer to shareholders.
Disclosure: I am long ALN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Monday, September 3, 2012

The Fed Is Growing the US Money Supply, So What?

As speculation grows surrounding the upcoming September 13th 2012 Fed meeting and whether or not there will be another round of quantitative easing to boost the economy, it is interesting to stop for a moment and examine how the M1 money supply has evolved over the past 30 years.

This chart provided by the St. Louis Fed gives a good glimpse at how the M1 money supply has evolved in the recent decades. It simply shows the money stock at the end of each month since August 20th 1982 in billions of dollars.

As they say, a picture is worth a thousand words and I thought it would be interesting to have a visual representation of how far we have come since the 2007 financial crisis. The last two rounds of quantitative easing have almost doubled the M1 money supply in as little as 4 years. One only has to wonder what will be the long term effect of going from 1.4 trillion to 2.4 trillion USD on the dollar. Even if it is currently the world reserve currency, it is obvious the US Dollar is bound loose value in the coming years. How is your portfolio positioned assuming such a scenario? Soon enough the world will notice that they are getting less and less value for their US Dallar holdings. Food for tought....