Cabot’s “Stock of the Month” … hint: it’s Chinese

Timothy Lutts doesn’t often send out really over-the-top out teaser ads, so I don’t often write about the various newsletters from Cabot — I do hear about them from time to time, and readers have reviewed a few of the services, but they haven’t yet bombarded us with “super hype” as so many other publishers do.

So I’ve got to find my clues and my teasers where I can — and in a recent email there were some hints about the latest pick for the Cabot Stock of the Month Report, which chooses one of the stocks picked by the other Cabot newsletters to highlight each month (they choose the best stock from that group, they’ll tell you — though of course, time will tell).

And the pick this month is from what had been an extremely high performing newsletter — the Cabot China & Emerging Markets Report. Of course, part of the reason it did so well was that China did so well, but it was atop the Hulbert leaderboard for much of 2006 and 2007, and according to the publisher it didn’t do nearly as badly last year as some other emerging markets letters — so perhaps it’s worth a look?

Unfortunately, the clues for their pick of the month are a little bit thin … here’s what we get:

“I’m very excited about this month’s stock for several reasons. One, it’s a great growth company, with revenues up 79% in the latest quarter and earnings per share up 52%. Two, it’s located in China, where there is no recession and where GDP is expected to grow about 8% this year. Three, it’s not well known, mainly because it only came public in late 2007. Four, and most important, our Cabot China & Emerging Markets Report just gave a buy signal!”

I think 8% growth might still be a bit optimistic for China this year, but certainly they’re still going to grow — and unlike the US, they have the cash to pay for their big stimulus programs, and the convenient discipline of a totalitarian regime that prevents the messiness of democratic stimulus and recovery debate, so the odds do seem to favor the Chinese economy being an above average grower going forward.

But what is the company they’re picking?

Well, I can’t be 100% certain with those limited clues — especially because this isn’t a perfect match for those clues, but I’ll give you my best Gumshoe guess:

Longtop Financial Technologies Limited (LFT)

This is one of relatively few IPOs from the fourth quarter of 2007 — which is when the market most recently peaked — that’s actually now well above the IPO offering price, which was $17.50 for LFT … as I type, the shares are going for about $23.50 (still far below the high price it actually traded at on that first day of better than $30, it was only the subscribers to the IPO who got that nice $17.50 price).

And yes, it is a growth company — which is why this is the best match I know for the clues given. They did have revenues that grew by 79% in the most recent quarter, as teased, but the earnings growth wasn’t necessarily exactly 52%. Earnings numbers always have a bit more play in them than revenues, but they reported earnings growth of 57.7%, and earnings per share growth of 45.6% … so perhaps you can split the difference if you like and fudge it to 52%, but just note that we might not be dealing with an exact match here.

This is a software company, focused on the financial sector (software solutions for banks, brokerages, etc.) — and while some other companies that rely on banking customers are hurting, they don’t appear to be right now. Software is generally a nice, high-margin business (LFT certainly exemplifies that, with gross margins of better than 70%), and financial services in China appear likely to be a boom market for quite some time as personal banking services grow to match the offerings of the more developed world.

There was a nice article on them in Investors Business Daily ten days ago, which also serves to reinforce the fact that this is a growth stock … and, to some extent, a momentum growth stock. They’ve also beaten earnings estimates four quarters in a row, which helps them to get an “A” from Louis Navellier’s grading system … which will probably entice some of you, and repel others.

Some growth stocks are also “value priced” these days, trading at levels that assume their growth will tail off, or that they’ve got hidden trash in their closets — not so for Longtop Financial, they trade at a substantial premium to the market. The current PE is in the mid-30s, and the forward estimate would give them a PE of about 21 — though earnings growth for the just-begun year (their fiscal year ended on March 31) is estimated at about 15%, pretty nice for a year when many companies expect to see their earnings shrink.

For other research on these guys, a good starting point would be the third quarter conference call from mid-February, transcript available here. From a quick glance at some analyst reports it appears that the major concerns might be competition, with more global software companies pushing into China and other local companies trying to grow; and concentration, with a huge amount of their business coming from the big four Chinese state-controlled banks, though they have also made a big push into insurance companies lately. Morningstar thinks they’re trading about 25% above fair value right now, for whatever that’s worth, and they get a very strong trend score from MarketClub.

If you’d like to make a different guess about the solution to these clues, here’s a good list of the fourth quarter IPOs from 2007 — it includes quite a few Chinese companies, none of which is nearly as close a match as Longtop Financial as far as I can tell … but who knows, maybe I missed something, or maybe their “late 2007″ clue was a bit squishier than I assumed.

Chinese stocks have certainly been on a nice trend in recent months — beating many other sectors and countries, on average — but there are plenty of folks who are still terrified of the repercussions of the economic shock for the export-dominated economy. Do you think we’ll see sunny days ahead for Longtop, or do you have a favorite Chinese investment to share … or do you think we should run away from the Middle Kingdom? Let us know with a comment below.

And if you’ve ever subscribed to any of the Cabot newsletters, please share your opinion by clicking here — we have one review in place for the Cabot China & Emerging Markets Report and a few for Lutts’ Cabot Market Letter, but none yet for the Stock of the Month Report.

The author will always disclose any direct long or short equity, debt or option position in any stocks written about as of the day of publication, and will not trade in any stocks mentioned for three days (72 hours) after publication. Full disclaimer is at the bottom of the page.

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1. Just one more thing; Cabot gave a buy price of $20 – $ 20.50 to enter. This price was never reached. They still reco to wait for a pull back before entering.

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   Posted by Fabian | April 14, 2009, 11:07 am

2. Right on Gumshoe–as a subscriber to that letter I can confirm your guess. For most of the past 12 months it has outperformed both FXI and CAF. It’s a play on the Chinese financial sector without having to make a bet on the banks. The stock of the month letter is a perfect newsletter for somone who doesn’t want a large portfolio of indidual stocks.one Stock is chosen each month on a random basis from each of the Cabot Newsletters.

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   Posted by Katie Catt | April 14, 2009, 11:15 am

3. Also everyone should be advised, as of yesterday there is an alternative way to purchase Chinese A shares in this country. We no longer only have the Morgan Stanley closed end fund, but IShares now has An A ishare ETF, which is listed in Hong & the US. The US stock symbol is (ifxaf.pk)

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   StockGumshoe Reply:
   April 14th, 2009 at 2:31 pm

   Thanks Katie — I remember trading that CAF for the huge premium swings a couple years ago, haven’t ever looked at the alternative.

   Just FYI for everyone, it’s an iShares product but it’s listed in Hong Kong, that’s why US investors might buy on the pink sheets (if they can’t trade in Hong Kong directly) — it’s not featured on the US investors iShares page.

   CAF is a closed end fund, a portfolio of individual stocks on the domestic Chinese market that tries to beat the index, IFXAF is an index fund that tries to match the A50 index of 50 big Chinese domestic-listed companies. Both take advantage of the allocated rights of qualified foreign investors to buy certain amounts of these otherwise off-limits stocks, though I think the index fund is actually a bit more complex in structure.

   Don’t know whether either one is a reasonable buy at the moment, or what the discount/premium might currently be.

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   Katie Catt Reply:
   April 14th, 2009 at 3:54 pm

   Here’s an article from today’s Seeking Alpha, discussing the merits of the new ETF vs CAF. I’m not necessarily endorsing the authors analysis but his info on sector holdings and top 10 stocks in each fund agrees with what I have found out.
   http://seekingalpha.com/article/29683-morgan-stanley-and-ishares-two-china-a-share-etfs

   [Reply]

   Posted by Katie Catt | April 14, 2009, 12:27 pm

4. I subscribe to Cabot and that is indeed the pick!

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   Posted by roger | April 14, 2009, 12:30 pm

5. OK all you Cabot subscribers — thanks for the confirmation, but please go to the reviews site and do your duty! We’d all like to know more about these newsletters and whether you’re happy with your subscriptions …

   http://www.stockgumshoe.com/reviews/tag/cabot/

   [Reply]

   Posted by StockGumshoe | April 14, 2009, 2:23 pm

6. In the latest weekly update by Cabot for this stock, (just moments ago) they say buy under $22, but they are still predicting a pull back to their original buy under in the coming weeks

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   Posted by Katie Catt | April 14, 2009, 4:14 pm

7. Terrific job of sleuthing, Gumshoe. I gather that Cabot gave the green light to Chinese stocks a couple of weeks ago, along with a couple of other analysts located in Hong Kong that I respect. I believe that much of their strategy is based on technicals rather than on-the-ground stuff, and they are highly risk averse, which is why they have done well, I think. They were mostly in cash during the downturn, from what I’ve gleaned, so their position at the top is not from picks but from NOT picking at the wrong time.

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   Posted by womanwithportfolio | April 14, 2009, 4:51 pm

8. Gotta plug it again. CSGH – China Sun Group High Tech Co – got a tip about 9 months ago from HERE. Lithium ION batteries. Don’t believe me look at the awesome earnings they reported today http://money.cnn.com/news/newsfeeds/articles/prnewswire/200904140830PR_NEWS_USPR_____NY98187.htm
   - they have niche technology with all the new electic cars in China. Get in under a dollar .

   Mike

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   Posted by Mike | April 14, 2009, 8:42 pm

9. I’m going to put in a word for Chinese stocks Agfeed FEED and General Steel Holdings GSI. Both are great growth stories at extreme low valuations and have risen > 30% in the last week and are still cheap.

   [Reply]

   Posted by Pete Ewing | April 15, 2009, 1:09 am

10. Having subscribed to Cabot China & emergg Mkts, Hsu’s China Strat and Hsu’s Asia Strats (that’s the expensive one) in the past, I really appreciate Cabot. They got out of China in time, whereas Hsu made great calls in 2006 & 2007, but never got out and lost most of those gains (I got caught, still without the sense to put in stops).

    Cabot has a recent teaser for 6 low priced China stops for $24.99.

    Any word on those?

    [Reply]

    

    Katie Catt Reply:
    April 15th, 2009 at 9:05 am

    The email with those picks is coming out tomorrow. Most are supposed to be under $10….If you follow their blog… stocks on their watch list have been (hogs) (asia) (dl) and (ej) I have no idea if any of the above will be included.

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    Mort T Reply:
    April 15th, 2009 at 5:01 pm

    Cabot also recommended EJ this week, which has fallen from a 2 year ago peak of $35 to $4, before rising fairly steadily to a $10.78 close today.

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    Posted by Mort T | April 15, 2009, 5:15 am

11. Well Mort the report is being sent via snail mail. In Cabot’s email today they did give a clue as to what one stock may be: the report now contains 7 stocks because “one has moved out of Cabot’s “low price” definition/range. My guess is (an it’s only a guess) that stock is(feed). Hopefully I’ll get the report before other stocks o the same thing.

    [Reply]

    Posted by Katie Catt | April 16, 2009, 11:41 am

12. Greatly appreciate your analyses. some months ago you did a gumshoe on a stock letter touting $15 billion of silver nsoon to be released by “X” Co. which has been lying dormant for 12 years. . Who was it and what happened?

    [Reply]

    Posted by Frederick Strong | April 16, 2009, 4:21 pm

13. Does Cabot say anything about their U.S. supplier who has a relationship to accelerate the deployment of multi-channel solutions throughout China? S1 Corporation (SONE) has a much lower multiple as well. However, on 4/9/09, FMR Corp., the parent of Fidelity, reported a stake of 13% in Longtop Financial Tech Ltd. (LFT) Interesting anyway.

    [Reply]

    Posted by Truthpeeler | April 18, 2009, 11:21 am