Buy This China Battery Stock, $5 going to $15 — Nancy Zambell

by Travis Johnson, Stock Gumshoe | October 10, 2009 5:12 am

This article was originally published on the members-only Stock Gumshoe Irregulars[1] site on October 2, it has not been updated but Nancy Zambell[2] is still using the same ad, most recently with a different artificial deadline of October 9.

One of the things that almost always works for newsletter ad copywriters is the deadline — you have to construct some sort of artificial reason for folks to sign up right now instead of waiting a few minutes and forever losing the impulse to buy that fancy new newsletter subscription.

And Nancy Zambell certainly has some solid copywriters working for her in the great InvestorPlace newsletter universe — so the latest ad from her comes in and tells us to …

“Take Your Triple in Maxwell — and Roll It Into This China[3] Battery Stock

“October 2 Deadline“

But the funny thing is that they must have had a wee bit of delay in getting this ad out, because I started getting it from them yesterday — that would be October 1 — and the text of the ad just below that deadline says …

“But we must establish our new positions TOMORROW, OCTOBER 1”

So yes, in case you had any doubt about it, they do just make up those dates, and they can just roll ’em over a bit if they have a delay in getting the ad finalized.

Should you rush out and buy this China battery[4] stock right now, by this new October 2 deadline? Well, let’s find out what it is first, no?

Nancy’s argument essentially is that the IPO[5] of A123 (AONE), the lithium[6] battery company that went public last week, marked the opening of the “floodgates” on energy storage. That was the IPO that got everyone excited about a possible return for the IPO marketplace — it priced at $13.50 and opened at $17, and is now trading in the low $20s. So it was a great boon for connected individuals and their investment bankers, but also a missed opportunity for the company to actually raise more cash for that equity.

But that’s not the point — it would have been great to get in at the IPO price, obviously, and sell the shares at a near-100% profit right away, but she’s not touting these shares right now, she’s got another stock in her sights. And an opportunity to once again claim, in her aw-shucks manner, that she’s the only straight shooter who does her homework:

“I don’t recommend A123—the financials are a fright. No one else will tell you that, of course—because no one else actually seems to read the financials any more”

A123 lost about $90 million dollars last year … on sales of, again, just about $90 million (one of those rare times when you get such a nice round-numbers profit margin of -100%, which would be like a counterfeiter who has to spend $2 to print and distribute a $1 bill). So yes, I think we can tell that the financials are “a fright” without Nancy’s help. Folks aren’t buying the financials here, of course, they’re buying the promise that A123 has valuable lithium ion battery technology and is, essentially, the US version of Warren Buffett[7]’s favorite Chinese battery maker, BYD.

And no, BYD is also not the stock that Nancy Zambell is recommending …

“Warren Buffett recently bought 10% of China battery-maker BYD for $230 million. He would have bought more, but more wasn’t for sale.

“And none of it is for sale to shlubs like you and me.”

That’s not true, of course — you’re welcome to buy shares of BYD if you like, you just have to buy it on the pink sheets or in Hong Kong, where it’s listed (1211 in Hong Kong, BYDDF on the pink sheets). Oh, and you have to pay a LOT more than Warren did, it’s one of the leaders in the Stock Gumshoe Tracking Spreadsheets, it was touted by Jeff Siegel[8] back in January about 400% ago, and I regretfully thought it was a bit too pricey for me to buy before that, when it first got the “Buffett Bounce” about a year ago. Ooops.

But my regrets about not buying BYD are neither here nor there — what’s the battery stock that Nancy is teasing for us to buy today? Or yesterday? Or whenever you think the “deadline” should be?

“… I went out and looked for a New Energy stock better than A123 and as good as BYD.

“It’s A $5 Stock—going to $15

“The Mother Lode for battery power (solar[9], too, and wind and clean coal[10], soon) is China.

“There are 50, count ’em, 50 battery factories in China.

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“Margins are too low for the U.S., but the China Advantage is labor costs. That’s why the Chinese have been able to dominate the solar panel business and that is why China will dominate the battery business.

“Not only that, but Beijing is pushing China’s leadership on battery power. Remember this: “20% by 2020.” As in: 20% of China’s power needs will come from renewables by 2020. And Beijing has the cash to make it so.

“So: we’ve got fat margins because of low labor costs.

“We’ve got Beijing backing.

“AND it is unknown: only 20% of the stock is held institutionally. Not one analyst in one thousand has even heard of it.

“AND earnings? Yes it has those: 9 cents reported in August, up from 3 in May. The anticipation of the news pushed the stock up from $2.91 to $6.15. That’s a 200%-plus surge in under a month.”

And we get more evidence that the back office is a bit confused about the calendar …

“THAT’S WHY it would be smart to buy this New Energy stock before the next earnings season, which begins next week.

“Indeed, with the A123 IPO coming on Thursday, I recommend buying this stock by Wednesday.”

So clearly they were hoping to get this ad out a week or two ago, but for whatever reason had to push it back a bit and forgot to update the copy.

But still, whether the invented “deadline” is the day before the AONE IPO (that would have been Sept. 23), or October 1, or today, October 2, I can at least tell you who this Chinese company is. The Thinkolator thinks that we’re looking at …

China Ritar [11]Power (CRTP)

This is a more traditional battery company than either BYD or AONE, they make lead acid batteries for industrial and transportation needs — think golf carts, scooters, and telecom, as well as other broad energy storage applications like renewable energy[12] (solar and wind) and emergency backups.

Ritar was just uplisted from the over-the-counter market to the Nasdaq Global Market in August, so it is, indeed, somewhat under the radar — and I’d agree that it’s certainly overshadowed by the flashier names like AONE and BYD. Being in the old fashioned lead acid batteries, however, means they don’t enjoy the lithium enthusiasm — though electric cars do still use the older, reliable lead acid batteries, which is probably also the battery technology in your current, traditional car … and Ritar does have a substantial presence in the Chinese electric vehicle market. The current leading edge is the nickel[13] hydride battery, which is what the Prius uses, and the lithium ion battery cars in the US market are just behind, with the Nissan Leaf and the Chevy Volt both expected to have lithium batteries.

That’s not to say that China Ritar is devoid of innovation — they do have what they call “nano gel” lead acid batteries, which are being deployed in some new subway projects that are enjoying the Beijing stimulus cash, for example. But it’s also not to say that I have any way of judging which battery technologies or companies will perform well in the future. There is a certain safety in choosing a company with a solid technology that’s cheap based on current earnings, even if you don’t get the nosebleed growth projectiosn — and that appears to be what you get with China Ritar.

They did earn nine cents a share in the last quarter, which was, like the prior quarter, a 50% upside surprise over analyst estimates, so that’s encouraging. The company is tiny, at just around $100 million, and trades at a forward PE of about 8, which makes them a much nicer value, based just on those current numbers, than the big-name lithium battery players like BYD, AONE or even the somewhat overshadowed-by-Buffett China BAK (CBAK). Probably a fairer comparison for China Ritar would be someone like Exide Technologies (XIDE), UltraLife (ULBI), or EnerSys (ENS)[14], the latter of which Navellier (Nancy Zambell’s fellow InvestorPlace editor) touted about a year ago, also on the back of the BYD and AONE enthusiasm[15] (yes, rumors of an A123 IPO started quite a while ago).

Enersys is also largely an industrial battery maker, also using generally more reliable and “old fashioned” battery technology — they’re certainly not identical, think forklift instead of golf cart, but they have some similarities — Enersys is about a billion dollar company and trades at a forward PE of about 12, so that provides some additional argument that China Ritar might be a value here. Their profit margins are fairly similar and both have been reporting lower or flat sales and earnings, but on those growth metrics CRTP is doing a bit better (sales dipping 30% versus 42%, year over year).

I can’t tell you if Nancy Zambell is right in touting CRTP as a $5 stock that’s going to $15, but I’d feel much more comfortable with this than I would the lofty valuations and new-tech promise of BYD and AONE right now — those companies may well help to build the future, but CRTP is still helping to power the present, and doing so while actually making a profit, which is saying something.

Of course, there’s also huge competition in the battery sector, not just among the older lead-acid and industrial storage providers like ENS and CRTP and hundreds of others, but also among the leading edge firms — remember that the companies who dominate the battery space now are not necessarily these relatively small firms or the hundreds of even smaller firms that are scattered around the world (admittedly, mostly in China), the biggest manufacturers are often subdivisions of the giant corporations, also often in Asia[16], that have supplied batteries for laptops and cell phones for decades, companies like LG and Panasonic that are also poised to be significant players in the next-generation batteries for electric cars.

And of course, if you worry that the push for lithium-based batteries will cause a lithium shortage, you might also want to look at the lithium miners — the overwhelmingly dominant player in this space is SQM in Chile[17], which has done very well (and been teased by newsletters many times) over the past year, and I wouldn’t be at all surprised to see teasers for the potentially “strategic” US-owned lithium producers like FMC Corp (FMC)[18] or Rockwood Holdings (ROC) in the months to come, either. (Lithium is abundant in the earth’s crust, but hasn’t been particularly profitable to extract until recently, so there aren’t many big producers or high-value deposits — the big untapped reserves appear to be in Bolivia, which makes them a political football, but no one seems to think we’re at risk of running out of lithium.)

So what do you think? Like the relatively value-priced Chinese battery maker China Ritar or one of its competitors? Prefer the lithium guys with their huge electric car potential? Rather buy a lithium supplier? Let us know.

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