“Chinese Medicine and a ridiculous PE — $9 to $100?”

By Travis Johnson, Stock Gumshoe, September 7, 2007

This came in the same email as the Chinese real estate brokerage play we looked at yesterday, and it’s an ad for another Trinity Investment Research product, the Recon Trade Alert that purports to be their exclusive fast trading advisory for small cap stocks.

And we’ll look at the teaser here, but first I have to mention some of the parts of the newsletter ad that I found most amusing:

He says that “it’s not fancy,” “there won’t be a lot of recommendations,” and, my favorite, “no complaining.”

Seriously: “If I make a recommendation that doesn’t take off to the moon, I don’t want any complaints. If you lose money, I don’t want any complaints. “

Refreshing honesty, I suppose … and also a nice contrarian way to advertise, make your subscribers feel like they’re really getting in on something down and dirty and special, no fancy shmancy customer service or anything.

And of course, the best part: “You CANNOT share these recommendations with ANYONE. Do not forward these emails to your friends or family. Do not share them with media of any kind.”

Nothing gets the Gumshoe’s juices fired up like a warning that these recommendations are “top secret” and far too valuable to be shared.

So, just thought I’d note for you some of my favorite “old faithful” quotes from the ad — it’s amazing how many newsletter ads use these same kind of techniques to make you feel like you’re joining an exclusive club with rules, instead of subscribing to an investment advice newsletter.

But anyway — we’ve got a teaser to get to work on. This, as the headline implies, is about a chinese medical stock that’s priced around $9, and “an analyst” thinks it might be headed for $100.

What does this company do? “develop, manufacture, market and sale modernized traditional Chinese medicines with a product portfolio of roughly 10 drugs…but they are banking on one in particular.”

It went public earlier this year.

There’s quite a bit of analyst coverage, considering it’s a newly public small cap: “This has led them to have outlandish coverage on this little $9 stock…with some expecting a 466% increase in revenue next year, and a high price target well over $100 premium to what it is right now.

And here’s something we can say about a few other small cap biotechs: “this stock, if there one drug does go blockbuster, truly could be one of the best investments in 2007.”

So what is Eric Dickson teasing us with for his Recon trading service?

From those limited clues, my best guess is that this company is …

Tongjitang Chinese Medicines (TCM)

They did go public not that long ago, back in March (and a weak IPO — here’s a Fool article about that). And the analyst projections are indeed all over the map — if you have any faith in the analysts, this one is a complete no brainer … according to Yahoo Finance, they’re giving it a forward PE of 1.3. Yes, that’s One Point Three.

OK, so that deserves a closer look. Could this be a case of a newsletter tease that actually understates the craziness of a stock’s numbers and potential?

Their main product, Xianling Gubao, has “trade secret” status in China. No idea how significant that is, but it’s a traditional medicine for osteoporosis. Sales are growing pretty well, paced by this product that I refuse to try to spell again, but earnings, at least as of the last quarter, didn’t go up because of an increase in costs — and that sent the shares tumbling, so you can now buy them for less than the IPO price if you’re so inclined.

The analysts must be really counting on some dramatic sales increases, because they’re expected to earn over $6 per share this year. Not knowing much of anything about the product, I don’t get it, but that’s where that “$9 to $100” share price tease undoubtedly comes from. Next year, those five analysts expect over $7 a share in earnings. For a $9 stock. Really.

I must say that I’ve never seen a stock like this — investors seem to hate it lately, but analysts are apparently convinced that it’s going to have truly massive earnings, and since they’re predicting more of the same I assume that they think those predicted earnings are sustainable and not one-time gains.

So we’ve got a company here with a forward PE of just over 1 … not a PEG ratio of just over one, but an actual PE. I’ve never seen that before from a company that looked like a going concern.

And (again, according to Yahoo Finance), the price target ranges from a low of 15 to a high of 117.

That’s just ridiculous. Makes me think I should at least take a flier on some options on this one, but some further digging would undoubtedly uncover what kind of wacky sunspots are screwing with these numbers … because this just can’t be right.

If you take the time to look at these and figger out what’s going on, please let us in on the secret. Even that low analyst target of 15 has to match up with an earnings estimate of near $6, because that’s the low earnings target … so there’s one analyst out there who believes a PE ratio of 3 is appropriate for this company, and apparently another analyst who thinks that a PE ratio of 20 or so is warranted. Aren’t these guys supposed to be lemmings? What’s going on here to shake my faith in the collusion and laziness of so many stock analysts?

I was actually kind of hoping that this stock would turn out to be the somewhat similar company American Oriental Bioengineering (it’s definitely not), because they have some great stuff on their website — including this:

“AOBO will insist on overcoming every internal and external difficulty, competition and challenge, rewarding the investors and society with the best business performance, and developing AOBO into a world-class brand.”

And, my favorite: “AOBO will fight for the better!”

No, wait, this is my favorite: “AOBO will bring greater happiness, health and love to the world!”

OK, so TCM is apparently a much better investment story to investigate … but clearly that’s much more entertaining than this, from the TCM website:

“Tongjitang Chinese Medicines Company is a vertically integrated and profitable specialty pharmaceutical company focusing on the development, manufacturing,marketing and selling of modernized traditional Chinese medicine in China.”

If it wasn’t for that super-wacky PE ratio and the wild disparity in analyst estimates, I’d have fallen asleep by now.

I want to be very clear here: Please don’t take my shock at the wildly low PE to mean that I think you should run out and buy shares — this one clearly deserves a much closer look before my money (or yours, I hope) jumps on board, but I must admit, I’m intrigued to learn the story behind this one. Happy researching.

Ah, just got an email from an early bird reader that alerted me to my error of haste — I should have read their releases, not just the data. The big IPO dilution is the key here, apparently, last earnings with diluted shares were 22 cents, not $1.60+. That makes much more sense, my faith is restored. But someone at Yahoo Finance needs to get on the stick and make some adjustments. And I’m guessing that analyst with the $115 price target needs to come back from vacation.

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3 Comments on "“Chinese Medicine and a ridiculous PE — $9 to $100?”"

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Anonymous
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Anonymous
September 9, 2007 4:05 pm

I love the teasers that solve all world problems.I just read one on PLKT that will solve the carbon emission problem. The writer was so enthused he is imagining $100 per share from $1.25. The stock went down to .82. Patience is a learned virtue. GI

Engineer79
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Engineer79
September 14, 2007 9:19 pm

I just received the PLKT advertisement too. Sounded good until I read an article that said that Chinese chemical companies can change one of their processess and sell the carbon credits for more than the money they make selling the chemicals. The reported stated that it will kill the carbon credit market and they will have to rethink the price for carbon credits.

Mike
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Mike
February 4, 2008 9:23 pm

Carbon offsets. Another clever financial engineering product (from Whartin, I believe). Between them and SIVs and AAA-rated CDOs and low doc / no doc subprimes how can this counbtry loose?

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