“$7 (or $75) China Stock to Hit $14 (or $150) With or Without You”

by Travis Johnson, Stock Gumshoe | January 14, 2010 11:04 am

It’s a requirement, it seems, for the various editors at Investorplace[1], including Robert Hsu[2] and Louis Navellier[3], to market their newsletters using this “$X stock to hit $2X with or without you” teaser. Either that, or it really works to haul in subscribers by the bucketload.

Either way, I always like to take a quick look at these to see if there’s anything to it — is the promise of a double in the stock just a marketing ploy?

Well, that’s probably always a safe assumption — but let’s have a look anyway, shall we? There are two of these teasers floating around right now, one for a $75 stock to hit $150, and one for a $7 stock to hit $14 — we’ll identify both, but focus more on the little guy.

“$7 China[4] Stock to Hit $14 With or Without You

“‘All thanks to China’s $200 billion education spending boom.

“‘Buy this one today and I guarantee you’ll thank me a thousand times by this time next year.”

If you’ve been smashing rocks here in the Gumshoe quarry for a while, that last bit might also sound familiar — Hsu and Navellier have both used this term many times in their ads, including some older ones here[5] and here[6]. Hsu’s “promises” to this effect that I’ve seen have lately had a bit more success than Navellier’s, but that may be due to the strong bounceback in China as much as anything else — and really, it’s worth remembering that it’s almost certainly neither Hsu or Navellier writing these promises, it’s probably the same copywriter just reusing his work. Or hers, of course.

But you want the name of our little Chinese education company, no?

Hsu provides a background rationale for investing in for-profit Chinese education — but we’ve also seen this rationale dozens of times as he and other pundits have argued for the sector over the past couple years and touted one or more of the half-dozen relevant firms. So we’ll just stipulate that, yes, the Chinese are very education-focused, short on schools, spending money like crazy on education, sending thousands of students abroad for education, and building an urbanized and educated society that requires far more higher education than 20 years ago.

So yes, it’s a big business — let’s check the clues to find Hsu’s favorite stock:

“When you consider our top company is one of China’s leading private education companies, 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.”

Hmmm, talk about deja vu. This whole paragraph was actually lifted from a prior Robert Hsu teaser from last May. Let’s check the other details to be sure:

“If you can own this one before it declares, you could easily grab 30%—50% gains in the next 90 days.

“Here’s why…

“Its e-learning business is growing rapidly at an astounding 25% a year, and as more Chinese enroll in college classes, this number is set to increase.

“Its Foreign Trade and Business College (FTBC) is on track to boost enrollment a whopping 73%.

“What’s more, its state-of the art, satellite online learning center is on track to increase its coverage exponentially, as more students flock to its respected distance learning programs that are beamed into villages and farms around the country.

“And that’s just the beginning.

“A quick look at the financials, and you’ll quickly see why my hands itch in anticipation of the profits headed our way.

“Management owns 41% of the stock, which has a market cap of nearly $3oo million.

“The company is currently sitting on $2.10 in cash per share, with no debt.

“The company earned a pro-forma net income, excluding a one-time charge, of 35 cents a share in 2008.

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“The company expects an EPS of 42 cents in 2009 when those numbers are finally reported.

“Throw in the fact that this company more than doubled investors’ money last year, and you can begin to understand why my palms itch in anticipation of 4th quarter earnings as the company is clearly headed for another breakout quarter.”

Well, at least they updated that section — so yes, we can keep the Thinkolator in the shelf and tell you that this one is …

ChinaCast Education [7]Corp. (CAST)

And yes, this is the same stock that Robert Hsu touted, with almost identical language, as a China education stock that would go from $4 to $8 with or without you back in May[8]. And actually, this time he was right — it did get over $8 last year, about four months or so after he teased it. That’s roughly the all-time high, also achieved back in 2007 not long after it got a US listing on the Nasdaq (that Fall, if you’ll remember, was the high water[9] mark for most Chinese stocks).

Hsu has also been pushing an almost identical ad for the “$75 China Stock to hit $150 With or Without You” — using the same education pitch and changing the details a bit, that one is clearly for New Oriental Education (EDU)[10], the granddaddy of the China private education stocks and the one that has probably been more teased over the years than any other. New Oriental is primarily known for their English language cattle car classes, and they’re a much bigger company, now near $3 billion in market cap, they bounced from $40 to $80 in the last China bull run, collapsed below $40 again as the market crashed, and are back near $80 again. Hsu has picked EDU many times before, I first noted it as one of his ideas back in 2007[11], but I also wrote that he was probably pushing it along with a handful of his other favorites back in November of 2008[12].

So does that make us question which one might be Hsu’s favorite, perhaps a little bit? One might wager that his favorite next time will be whichever one did better in this marketing campaign as catnip for subscribers — and given the general predilection of the trading enthusiast for lower priced shares, I’d wager that we’ll see more pushing of CAST ahead than we will EDU. That’s just a guess, of course.

So CAST has indeed roughly doubled from last May, and they are profitable — though they’ve also raised a fair amount of money by selling stock recently, so the income per share numbers aren’t climbing as quickly as net income. Like EDU they also do English language training, but they are more focused on traditional higher education and on their education network — they own two accredited universities, The Foreign Trade and Business College of Chongqing Normal University and the Lijiang College of Guangxi Normal University, and in the very high margin side of the business they provide e-learning services to all levels of education (other universities, K-12, business training, government employees, etc), including English language, vocational training, and interactive distance learning applications.

The numbers continue to look pretty solid for CAST — they carry a fair amount of net cash and trade at a small multiple of book value (just 1.8), but they are likely to use that cash in growth and acquisitions, and the company does have very large insider ownership, with recent insider purchases, though that insider and major holder ownership is also just as much a reflection of their youth as it is the confidence of management. One person, the Chairman and CEO, owns more than 5%, and another 12%+ is owned by an investment fund (Fir Tree). Management reported that it was buying another $5 million in shares in a private placement last month, but that doesn’t seem to be reflected in the SEC insider transactions yet.

When it comes to earnings, analysts expect 41 cents/share this year and 57 cents next year — so a forward PE in the low teens, which seems quite reasonable for a rapid grower. The risk, probably, is as much in their small size as anything else — and, of course, in the “country risk,” if the Chinese real estate[13] or other markets are really in a bubble, and that bubble pops, one imagines that most domestic service companies would suffer. Then again, it’s always possible that the private education firms could, as they mature, show the same countercyclical tendencies as the big US private colleges — when people get laid off or are worried about getting laid off, they go back to school to improve their earning prospects, so as long as the government is around to backstop student loans there’s the possibility for growth.

Add in the fact that China’s baby boom-age generation, long accustomed to a very high savings rate, is sponsoring the education of their (single) children, sometimes known as the “little emperors” for the way they’ve been focused on and, arguably, spoiled, and it’s reasonable to assume that perhaps a typical (middle class) family’s full investment in their single child and obsession with education will lead to more investment in making sure those children are educated enough to be economically competitive. I like CAST’s education service offerings more than the big bricks and mortar universities, since they offer a much higher margin and don’t compete with state entities to the same degree (likewise, I prefer service providers like Blackboard to private colleges in the US), but they’ve certainly proven that they can grow, and college enrollment in China has grown about ten times as fast as US enrollment, so the underlying growth of the sector should help all of the stocks to do well.

That said, I don’t own CAST or any of its competitors, and I don’t know what the competitive landscape looks like — other firms are proliferating like crazy in the US stock markets, including old stalwart EDU as well as ChinaEDU (CEDU), China Distance Education (DL), CIBT Education (MBA), Noah Education (NED — more educational toys than colleges), and ATA (ATAI), and I’m probably forgetting some … but more importantly, this is probably yet another area where it’s worth remembering that the companies that trade in the US don’t represent the entirety of the market — there are hundreds of other private universities and education companies in China as well, including many of the big international for-profit education[14] firms, offshoots of private universities in the US and Europe, and locally traded or private companies. And despite the assumption that they might logically be expected to be a bit countercyclical, as I noted above, they in fact move like crazy just like almost all of the other China stocks, particularly the small ones … and largely in the same direction.

So what do you think? Robert Hsu is using much the same language in these teaser emails today, but he’s teasing CAST for his more expensive Asia[15] Edge service, and EDU for the “introductory” China Strategy[16] newsletter — does that make CAST a sexier pick for you? Did you get on board when we talked about this back in May, or do you think it’s worth a nibble now? Worried or enthused about China? Let us know what you think with a comment below.

And if you’ve ever subscribed to either of Robert Hsu’s services — or the many other Investorplace titles that use similar ads, from Navellier or any of the other editors, please click here to review them (or see other subscriber reviews)[17]. China Strategy[18] is the fifth-ranked newsletter for international investing[19] according to our reviewers, Asia Edge[20], with far fewer reviews so far, is tenth as of this moment. Thank you!

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