“Chinese Penny Stock Lands Deal with Wal-Mart”

by Travis Johnson, Stock Gumshoe | March 8, 2010 2:55 pm

“What happens when a tiny Chinese Penny Stock lands a deal with Walmart?

“This tiny company’s amazing new product line will be sold by the world’s biggest retailer (with 4,258 U.S. stores). Similar deals have rewarded early investors with gains of 1,838%… 748%… and even 10,775%.

“‘Our factories are working overtime to keep up with customer demand. We believe [we are] on track to achieve [a] year of record sales.’ — CEO of this tiny Chinese Stock”

That’s how the latest ad launches for Frank Curzio[1]’s Penny Stock Specialist[2], the newsletter he launched with Stansberry & Associates after coming over from TheStreet.com[3], where he had written a newsletter with a similar focus. I don’t know how his new letter is doing, but it’s certainly getting some marketing support — and he has identified a couple interesting ideas for us so far, including TriQuint, the Apple supplier that has done pretty well since he teased it about six weeks ago[4] (that one’s also still being actively teased, including later on in this same ad letter). So perhaps it’s worth taking a look-see at his new teaser, eh?

This tease is all about a Chinese company that landed a deal with Wal-Mart to sell their products. Getting into Wal-Mart has long been the holy grail for small manufacturers, of course, though the pricing pressure also sometimes makes them question what they had wished for … here’s how the teaser puts it:

“We conservatively estimate this deal could help send the share price of this penny stock up by more than 200% over the next few years, no matter what happens in the U.S. economy or the stock market.

“How can we make such a bold prediction?

“Well… if there’s been one investment strategy that has reliably paid off big-time over the past decade, it has been to invest early in small companies that land lucrative deals as Wal-Mart suppliers. “

And they give a couple examples of under-the-radar stocks that had huge boosts from Wal-Mart sales increases, Cott Beverages and RG Barry.

And what do we learn about today’s “penny stock” that has a deal to sell their stuff to Wal-Mart?

The first clue is that they sell “kitchen products.”

The second is that they got their Nasdaq listing after doing a “reverse merger” with a publicly traded shell company, (very common for Chinese stocks these days — in part because it’s a lot harder to get in line to raise money on the Shanghai market than it is in the US).

And one final spate of clues:

“For one, as I’ve been detailing, they landed their first multi-million dollar deal with Walmart, and will produce kitchen products to be sold under various brands.

“The company also landed a deal with the second-largest electronics retailer in China[5] (with 885 stores). Conservative projections for sales in these stores in 2010 is $29 million. One firm, whose work we respect (William Blair & Co.), says: “We expect domestic (China) sales growth to exceed 300% in 2010.”

“This tiny Chinese firm has also secured deals to manufacture products for Home Depot, Target, Tesco (the world’s 4th biggest retailer), Black & Decker, and Toastmaster.
What I also really like about this firm is that they have basically no debt and their sales are absolutely skyrocketing….

“… this firm still handles some things the “Chinese way.”

“What I mean by that is, they are very secretive. For example:

“First, the company does not hold conference calls for investors, which is unusual for a penny stock listed on the NASDAQ. They also do not provide a U.S. phone number, although nearly 35% of their sales are from North America.

“Also, this company just purchased a small competitor in China, but did not release the name or terms of the deal… only that in 2010 they expect to earn $2 million from the acquisition.

“The point I’m trying to make is simply that this is a very small and little-known stock. Yes, it has just landed a deal with the world’s biggest retailer. But companies that are this small, especially those with operations about 7,000 miles from Wall Street, have definite risks.”

So who is this little “penny stock?”

Keeping in mind that what Curzio really specializes in are “low priced stocks,” much like with his old Stocks Under $10 newsletter — the low share price is the determinant, not the market capitalization, so he has certainly picked many multibillion-dollar companies.

This stock must be … Deer Consumer Products [6](DEER).

Deer is indeed a manufacturer of kitchen stuff, mostly small appliances (blenders, etc.). They did buy an unnamed small kitchen product manufacturer in China just last month [7]and predict $2 million in annual profits from that acquisition.

And the CEO did issue a quote along the lines of the one used in this teaser — though if the teaser was complete it would have noted that the quote was from last May, expecting record sales in 2009. Which they did have, of course, and may well have again this year, but the quote is aged … the company has issued similar statements several times, but the most direct version of the quote was from a press release about an initial sale of juicers to Wal-Mart[8].

This stock has been a wild ride, in part due to large deals like selling to Wal-Mart and in part because of increased attention for this profitable and fairly small company (market cap of $325 million) — a quote from a recent AP story[9] sums it up well:

“Deer said it expects net income to roughly double in 2010, with revenue of $155 million. That fell just short of the $157.7 million analysts polled by Thomson Reuters expected.

“Shares fell $1.18, or 9.3 percent, to $11.47. The stock has traded between 46 cents and $18.97 over the past year.”

Yep … even for this past crazy year, trading between 46 cents and $19 is a little ridiculous.

The stock is no longer under $10, but it did dip briefly under that key (for Curzio) level a few weeks ago, before the runup into their earnings release (the release is here[10], the projected sales fell a little flat for investors but all else is sunshine and rainbows), and it’s now trading at about $12.50. The analysts are probably make fairly wild guesses at this point, since the company’s numbers are evolving quickly, but they expect 73 cents per share in earnings this year, and 90 cents next year, so the forward PE ratio is somewhere in the neighborhood of 14 — the trailing PE, based on 2009’s numbers just released (53 cents in earnings), is about 24, and revenue and earnings growth both came in at well over 100% in the last quarter.

They are seeing very aggressive growth in the domestic Chinese market, and building their Deer brand name there, though that still makes up less than a fifth of their sales, and they continue selling in many big-name US stores under store brands and other brand names (Target, Home Depot, Black & Decker, that crazy “Magic Bullet” infomercial chopper thingy). So yes, when you get a free Black & Decker coffeemaker with your new circular saw at Home Depot, it’s probably from Deer or one of their competitors.

What’s the downside? Well, this looks like a company that’s trying to move up the value chain, design their own proprietary products, and differentiate their offerings even as they build more relationships with key retailers like Wal-Mart, but they began as, at heart, probably largely a commodity manufacturer of very low cost goods. Whether they can continue to thrive and hold off the competition — many of whom didn’t survive the recession, but will come back in some other form — will depend on retailer and OEM relationships, product differentiation, and continued cost cutting. I’m pleased to see — and quite surprised, honestly, that their profit margin and operating margin are both over 10%, and, if I were an investor, I’d probably watch those margins very closely … especially if there’s any sign that they’re hitting a plateau where they’re likely to grow at less than 100% a year.

So why now? Well, they are doing an investor road show right now, which is probably going to help them garner more attention, though they say they’re not raising cash at the moment (they don’t appear to need cash, and they have no debt). And they are in the enviable position of having access to the US market for funding growth, which probably gives them a leg up on some of their Chinese competitors (Deer is, thanks to the US reverse merger listing, technically a Nevada company with all of its operating subsidiaries in China).

I have no idea whether Curzio will be right about a 200% gain for this stock, but I’m pretty sure this is the company he’s talking about … and it is certainly growing very nicely. If you’ve got an opinion on Deer Consumer Products, just let us know with a comment below.

And as for Curzio and his Penny Stock Specialist? Well, if you’ve been a subscriber we’d like to know whether you like the newsletter[11] — I think we launched the reviews site after he had already left TheStreet.com, and have yet to hear from any of the subscribers of his new letter. Just click here to review it for us and let your fellow investors know what you think.[12] Thank you!

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