Tuesday, January 18, 2011

China Valves Technology, Inc. (NASDAQ: CVVT) Q1 Analysis

Recent price: 7.66$
P/E Ratio: 4.87
3 month Target Price: 11$

Company Description
As you can determine from the name, China Valves Technology, Inc. is part of the recent wave of Chinese companies listing in the US. As described on their website, the company develops, manufactures and sells metal valves. The Company’s products are essential to the thermal power, water supply, sewage disposal, oil and chemical, metallurgy, heat power, and nuclear power industries.

The Company is headquartered in Kaifeng, Henan Province, in the People’s Republic of China.

China Valves is an industry leader that sells its products throughout China and recently began exports to Europe and rest of Asia. The Company has internationally recognized certifications for a number of its products.

Confidence Margins
Strong resistance $12.64 (+65%)
Light resistance $11.46 (+50%)
Light support $6.10 (-20%)
Strong support $5.00 (-35%)

The recent price drop of the company's stock is easily attributable to the controversy surrounding their auditors, Frazer Frost, LLP. A lot of the companies that were audited by them were delisted from major exchanges in the recent weeks because of their lack of rigor in the auditing process. Even if this manufacturing company has a lot of intangible assets on their balance sheet, these can't be overvalued to the point of justifying such a drop in the stock price. As it can be seem on the graph, the stock has already recovered a bit one day after we found it but there is still room for growth in the coming months.

Entry strategy
For the cautious investor:
Buy the stock for 8$$ or less.

For the risk-taking trader:
The June 2011 10$ call option contract seems to be the position to take, they can be acquired for about 95$ per contract.

Exit Strategy
For the cautious investor:
Sell when the stock reaches 11$, or keep it until 12$ if you are more bullish. It is highly recommended to keep the position on check if it goes sour.

For the risk-taking trader:
The contracts should be kept until the underlying reaches 11$. Keep in mind the daily theta since the value of the contract will decay as the maturity approaches. The investor must keep a look for any drop in the stock price that would cross the light support line as it will have a disproportionate affect the option prices.

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