“$4 China Stock to $8 With or Without You” — Robert Hsu

by Travis Johnson, Stock Gumshoe | May 7, 2009 11:07 am

Well, I promised I’d have a look at Robert Hsu[1]’s other hyperactive teaser, and here it is … he’s touting his Asia[2] Edge newsletter this time, not the less-expensive China[3] Strategy, but now it’s with a tease that he’s found a Chinese education stock that he thinks will go from $4 to $8.

This is a standard strategy from the newsletters at InvestorPlace — we’ve seen several of these from both Robert Hsu and Louis Navellier[4] in the last couple years, using almost exactly the same language. In fact, if you look at the plain text hiding beneath the bold graphics on this email ad, you’ll see that they forgot to change the underlying text, which says “FLASH ALERT – $8 China Stock to Hit $16 With or Without You.”

So maybe they’re saving that up for when this is an $8 stock again … or just recycled it from a different stock (this particular one hasn’t been at $8 since the fall of 2007). Either way, it’s a nice reminder that when you see these specific stock price numbers that look so nice and clean ($4 to $8, perfect!), they may well mean more to the marketers than they do to the newsletter editor himself (or, in still pretty rare cases, herself). Might not want to bet the farm on that.

But clearly, Hsu does like this stock —

“The Chinese people know that education is the MASTER KEY to raising themselves from poverty to wealth, and are foregoing the clothes, the cars, and the cell phones to make sure their children succeed and grow rich.

“As you’ll read in tonight’s Asia Edge[5], the biggest profit taker of all will be a little-known private China educational company that offers a Harvard-style education at affordable prices with 64% sales growth, 48% earnings growth, and a $12 million gross profit.

“Please add this one to your holdings today.

“Our research indicates that the coming $200 billion education-spending boom will not only double the company’s earnings … but also hand you a quick 30% to 50% gains in the weeks ahead.”

And a bit more …

“When you consider our top company is China’s leading private education company, with over 131,000 students at 15 colleges and 6,500 secondary schools—and is about to boost enrollment by another 5,000 students—you can see why I’m so excited about this company and why I’m recommending you add this one to your holdings immediately.”

There’s more, but that’s certainly enough to identify the stock. So … ready for the news?

This is ChinaCast Education [6](CAST)

And yes, the ads are having an impact — this one jumped up on high volume on Friday and Monday, though it’s now coming back to earth a bit, shares are now below $5 again. The teaser info matches precisely this time — including that nice 64% sales growth, and, as teased, the company is reporting earnings on Monday after the market close, with a conference call on Tuesday morning.

I can’t tell you whether or not they’re going to beat their earnings estimates (and this is a small company, with only four analysts following the stock and a sub-$200 million market cap) — for what it’s worth, the analysts are looking for an average of eight cents this quarter and 35 cents in earnings for 2009, giving them a current year PE ratio of 14. Not bad if they can keep the growth up.

This is a business with big demand but tough competition — education is big business in China, and it has already spawned several publicly traded education companies that are larger than CAST, like market leader New Oriental Education (EDU)[7], which is best known for English language classes, and outliers like Noah Education (NED), which makes learning technology tools and toys, among several others. And since this is a booming market, it won’t be a surprise that most of the other big education companies worldwide, like the Washington Post’s Kaplan unit, are also trying to make a name for themselves, as are relatively new ventures backed by entrepreneurs and foreign investors.

ChinaCast is adding some scale, they just recently agreed to buy another private university that will add close to 8,000 more students/customers to their rolls, so revenue should continue to climb. And before that purchase, at least, they had plenty of cash — close to half their market cap — and a nice high-margin business that generates cash without requiring much long-term debt.

Right now most of the stories about Chinese universities focus on the fact that this year’s graduates are entering a market with no jobs, which I suppose could either boost enrollment in training programs and graduate schools as students try to improve themselves and hide from the poor job market, or depress new enrollments as students see less value from higher education. I expect that the huge need for more skilled workers in China in the long run will continue to make private education a profitable enterprise, but I don’t know whether that means ChinaCast will be more or less profitable this year than last.

Private universities have been seen as a refuge for US investors during times of rising unemployment, though that trade got a bit ahead of itself earlier this year and most of those stocks have fallen off their January highs (DV, APOL, CECO, etc.). The Chinese education companies didn’t necessarily benefit from that countercyclical trade or hold their own as well during the downturn, or spike at the same time, but they have held up better than many other companies in China over the past year (CAST and EDU, for example, are both about 20% below their year-ago prices, but have beaten the FXI index of large Chinese companies).

If you’ve got an opinion on CAST, or on New Oriental or any of the other Chinese boom stocks that seem to be coming back now, let us know with a comment below. And if youv’e ever subscribed to either of Robert Hsu’s newsletters, let us know what you thought by clicking here[8].

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