I haven’t looked much at Tobin Smith and his ChangeWave services over the past year or so — I think the last teaser of his that I looked at was hyping Sigma Designs back in April of 2008, which he promised would be a huge gainer within a year. Of course, that didn’t take into account that the financial world was about to explode and bring down nearly every stock with it — to be fair, my portfolio and the picks of most experts didn’t predict the carnage, either — but SIGM did do reasonably well over that last year or so, compared to the market (it’s down 20%ish).
Smith is fun to watch in a bull market, and just after the market peaked, in the Winter of 2008, he was predicting great things for his favorite microcap stocks — tiny guys like Raptor Networks, SpareBackup, and Oculus Innovative Sciences, which he said were “99% sure things” to double when the market recovered. That was 18 months ago, and of course the market is far from recovering to that point — I haven’t checked all of those stocks, but one that he pushed most ardently was Raptor Networks, and it was around 80 cents at the time (he touted it for at least a year or so before then, often moving the stock significantly as he went). It did better than double after it hit bottom, but the low wasn’t 80 cents in February of 2008, the low was about ten cents in April of this year (Raptor trades right around 20 cents now).
His basic premise may well be right, that the smallest and most sensitive stocks do best in the early stages of a recovery — but that doesn’t necessarily give you any better chance of picking the price right before that recovery begins (or avoiding a far worse collapse than you expected).
So it seemed like the breathless teaser ads for Smith’s ChangeWave Microcap newsletter dried up a bit during the market crash — even if that might have been a good time to get in on little speculative picks, that certainly is not the time when those kinds of picks get potential subscribers excited.
That’s not to say that this is unusual — we are all, of course, our own worst enemies when it comes to investing, and the newsletter publishers know just what is likely to get us excited. After the market crashes, we want to hear about bear market bets, but after it recovers, we want to hear about booming growth stocks — witness the fact that among many of my readers, Martin Weiss was hailed as a hero for a while last Summer and Fall for predicting the next depression and betting on inverse ETFs, but after missing the Spring rally he’s now sometimes derided as a dangerous fool. And of course, gold stock teasers almost disappeared when the price fell below $900 an ounce, but are out in force when gold nears $1,000 and makes headline news — the human tendency to buy high and sell low is almost unavoidable.
But you don’t want to hear my philosophizin’, you want a stock pick, yes? Toby Smith is claiming that the biggest billionaire-builder industry is wireless telecom (you can certainly back up that point, at least in the developing world), and he tells us that he’s got a tiny stock that will help you join their ranks … or at least make a lot of money. He’s looking for “millionaire-maker” stocks, and the promise here is that he’s found one in a Chinese 4G wireless company.
Here’s the big picture pitch:
“China is the next frontier where fortunes are about to be made in wireless.
“And I want to introduce you to the best name in the space.
“It’s NOT any of the widely recognized China telecoms. In fact, it’s actually an American-based venture, working in partnership with the Chinese government to deliver what all the big names have failed to provide:Are you getting our free Daily Update
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“Dependable, fast, wireless broadband technology needed to complete China’s entry into the modern world. The guys behind this story will be the next wireless billionaires.
“And China’s incredible demand for broadband connectivity is your ticket to creating millions in new wealth for you and your family.
“Legacy wealth. Retire and travel the world wealth. Tell the boss to ‘kiss off’ wealth.
“This is THE stock. The time is now. And I have a free report, explaining all the details for you online. Make Your Millions in the New China Wireless Boom is ready for you now.”
So, sounds pretty appealing, no? Here’s a bit more of the company story:
“Your investment has the ‘full backing’ of the Chinese government — the partnership is actually 51% state owned.
“The Communist party has a lot riding on this — not just money, but also in terms of prestige. If Bank of America and Citigroup were deemed ‘too big to fail’ here at home, this partnership may be linked too closely to government interests not to succeed.
“You see, high-speed wireless rollout has been pretty much a failure so far.
“Chinese leaders made bets on existing companies and lost face, as efforts sputtered due to cronyism, bad technologies and poor management.
“In desperation, these leaders turned abroad for help — to America, to be more precise. Fed up with delays and excuses, they chose an American firm with proven experience to deploy high-speed wireless on-time and on-budget.
“This is a BIG company you’ve most likely never heard of, because they do all their work behind the scenes.
“But now they’ve partnered with the Chinese government to form a small microcap company that I believe is destined to become a mega-giant on the China telecom scene — making us very rich in the process.
“I’d be disappointed in anything less than a ten-bagger. I’m expecting a twenty-bagger, thirty-bagger or more.”
Smith says you can buy it under $1 now, and “bank your millions later.” That’s enough to get us a little start, but how about some more specifics?
“They are developing and deploying China’s first TRULY high-speed wireless network.
“It’s a true wireless 4G system already delivering service at 5-10 megabit speeds in 5 major cities. But with financing in place, this company is on track to a 19-city rollout over the next 24 months — while boosting service to 100-megabit speeds!
“And get this — it owns a MONOPOLY for the 3.5MHz spectrum in these cities, with its license running through 2013….
“This tiny partnership is already the fastest-growing broadband provider in China — quickly adding 600,000 new subscribers since rolling out service in Beijing. I project 1.5 million subscribers by the end of the year — and that’s just the launch pad for the rocket flight to follow.
“The rollout schedule is spectacular!
“The 19-city rollout may seem ambitious. But this company’s technology is not only lightning fast, it’s also incredibly easy to get up and running. That’s why my projections call for 5 million subscribers and over $750 million in revenue — at around 30% margins — by the end of 2011.
“Plans are in the works for an ongoing subscriber-count audit by a major international accounting firm.”
So who is this little partnership? According to the indisputably powerful machinations of the Thinkolator, this must be …
ChinaTel (CHTL, trades over the counter — very low volume and it’s already bouncing around like crazy, even without thousands of Stock Gumshoe readers taking interest, so be careful)
This is an odd little cross-border machination of a company — from a quick look on my part, it looks like they began life as Mortlock Ventures several years ago, intending to do mineral exploration, but then decided after a couple years (just last Spring, in fact), to change their focus … they changed their name to ChinaTel and acquired TrussNet, which I guess was a subsidiary or affiliate of the big engineering firm the Truss Group that has done a lot of telecom infrastructure work, and TrussNet owns 49% of ChinaComm, which is a Cayman Islands company that is controlled by, I assume, some level of Chinese government investment.
So in the end you get, for a share of ChinaTel, minority interest in one primary project, the rollout of WiMax and mesh WiFi networks in a bunch of Chinese cities.
Oh, and ChinaTel just agreed to sell 49% of itself to an investment firm, Olotoa, for a big cash infusion over the next couple years. So that will bring more cash to build the networks, as well as a heavy degree of dilution of your ownership stake (though not earnings dilution, of course, since it seems unlikely that they’ll have any earnings just yet).
OK, so this is a business I hardly understand at all, especially in China — the country has indeed had some hiccups in rolling out 3G wireless with their major telecom companies, though I have no idea whether the situation would be called a “failure” at this point. And there are certainly a lot of potential customers. That’s about as far as my understanding goes — China appears to be a bit of a battleground for 3G and 4G wireless standards and services, since the government appears to be setting up competition to make sure many different technologies get a shot, and I have no idea whether or not they’re predicting — or predetermining — a winner just yet. Here’s a press release on the launch of service in Beijing just over a year ago., and here’s a diagram that tries to describe the corporate structure.
If I’m right about Smith’s pick here he actually understated their holdings — they actually have the rights to the spectrum in 29 cities, not 19, though he was right about the fact that they’re focusing on five big cities to begin, and that the rollout began in Beijing. I have no idea whether he’ll be right about his projections, or whether they will eventually get to five million subscribers or $750 million in revenue — it’s early days yet, and they do have a big investment coming in that would dramatically increase their market capitalization, but of course, the stock is also trading at about 80 cents a share and their reports claim that they lost over a dollar a share last year and had no revenue in 2008 … so it’s all about what happens with this WiMax/WiFi rollout, whether they get customers, what that spectrum is really worth if and when wireles broadband becomes a mainstream offering, how much customers will pay, and how long it takes before they build up a critical mass to get to profitability … and, given their complicated ownership structure and capital requirements, how much of that profitability will trickle down to common shareholders.
I’m sure that Tobin Smith knows more about this company than I do, I only know enough to personally consider this a lottery ticket type of stock, which is, of course, no surprise for a tiny wireless joint venture that trades under a buck and is touted by a microcap newsletter. Will it be a winner? Is there some great value here? Will the shares jump when they start spending the cash from their new big investor, or will the dilution drive shareholders down? Do you like a startup here, or do you prefer a giant like China Mobile (often touted by Smith’s fellow Investorplace editor Robert Hsu, by the way)? Let us know with a comment below.