by Travis Johnson, Stock Gumshoe | July 21, 2010 11:22 am
That’s the promise from Robert Hsu in his latest round of teaser ads — that this one stock will have such a powerful impact on your portfolio that you’ll be able to “change the way you live.”
That’s nothing new, of course — teasermeisters have been sprinkling their ads with photos of luxury cars, boats, mansions and bikinis for as long as I’ve been writing in this space, and using language like “what you do with your new wealth is up to you” to help you conjure up whatever visions of avarice lie sleeping in your lizard brain, and, to be fair, Robert Hsu doesn’t get into any of that this time around … just the promise that he “could change the way you live.”
And of course, Robert Hsu is no stranger to this space, either, I’ve written about probably dozens of his teaser picks over the last several years, and, as you might expect, there have been both winners and losers — and my readers’ sentiment about Hsu’s newsletters has shown roughly the same kind of volatility as the Chinese market … no surprise, when China’s going up, his stocks tend to do better … when it’s going down, they do worse.
This ad is for his cheaper newsletter, China Strategy, which is “on sale” for about a hundred bucks a year, and the teaser says that the report on his special stock went out to all subscribers to the newsletter last night … so let’s find out what it is and see if it’s worth a nibble, shall we?
“Home Shopping Comes to China and the Profits Are Going to Be HUGE!
“The reason is simple:
“When you take a country that’s gadget crazy, combine that with rising consumer wealth, and then throw in 1 billion TV shoppers, you’re looking at a profit opportunity of epic proportions….
“Chinese consumers are just as crazy about buying stuff on TV as they are about all things wireless, and they now have the money to buy almost whatever they want from the convenience of their own homes!
“The result has not only doubled investors’ money in our top infomercial shopping network in the past 20 months… but the effect is going to deliver similar gains in the next 20.
“All thanks to this powerful new shopping trend that’s sweeping across China RIGHT NOW.Are you getting our free Daily Update
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“For these reasons, if you can grab a few shares of our leading recommendation now — before it declares earnings in August—you could easily grab the next 50% rise in the next 90 days.”
OK, so that’s the big picture — home shopping in China is expected to boom, thanks in part to the huge population of rural residents … and this company that Hsu apparently likes should profit. We know that the stock doubled over 20 months (actually, he laters says it handed investors 140% gains, though he didn’t say it was his investors) and that it reports in August, but let’s get into some more of the specific clues so we can identify this company for you:
“Our TV shopping company is clearly the 800lb gorilla of the industry, airing infomercials across 46 channels and covering all of China’s major cities and counties with 20,000 retail channels to boot!
“A quick look at this company’s competitive advantages and you’ll see why my hands itch in anticipation of the profits headed our way.
“* The company is the China’s leading home-shopping network, with the biggest brand name and the hottest products.
“* What’s more, the company not only profits from its own products but also profits from buying the exclusive rights to other vendors’ successful TV products.
“* Unlike some TV-only shopping networks that have only one media outlet, this company also sells third-party products through its strong national distribution network, which includes retail outlets in bookstores, pharmacies, specialty retail chains and department stores.
“* As if that weren’t exciting enough, the company is out-marketing, out-foxing and out-profiting its closest competitors by staffing its phone lines with the best telemarketers in the business—top notch sales pros that close 23% of all phone sales.”
So that’s pretty interesting — I confess to knowing almost nothing about home shopping or infomercials, save for a passing knowledge of the late Billy Mays and a surprising and certainly unnecessary blind hatred of the ShamWow guy, but I can see that it stands to reason that distribution and marketing would be a decent business in China’s emerging consumer culture.
But what really caught my eye was the next bit of the ad, all about the financials …
“* The company has sales growth of 30% a year, and it is trading at 33% below its book value!
“* The stock is selling even below the value of its net cash holding of $5.68 a share.
“* PLUS when you consider the company’s market cap of only $155 million, and the company has cash and assets on its book worth over $240 million, who says you can’t buy dimes for nickels on Wall Street?
“* When you throw in the fact that gross profit rose 21% and gross margin came in at 48% in the most recent quarter year-over-year, you can see why I’m anxiously awaiting August 16th earnings release and the price boost that will inevitably come from another breakout quarter.”
So that’s why I wanted to feature this teaser pick today — it’s awfully rare to find a stock trading for less than the value of their net cash, so while these situations can certainly be value traps or money-losing junk, my inner Benjamin Graham always wants to have a look when the enterprise value comes up negative (enterprise value, in case that’s a new term for you, is the combination of net cash [cash minus debt] and market capitalization [number of shares times the share price], and it’s supposed to roughly estimate what it would cost to buy the whole company from stockholders and bondholders.
You’re already sick of my blathering though, I imagine, so I need to tell you who this is: This teased stock is Acorn International (ATV)
And yes, Acorn is a very over-used brand name (who doesn’t want to grow from a tiny acorn into a giant oak, after all), so if you do a Google search for them you might not even find the company’s own website right away. They have been around for just over a decade, and it does look from here like they are the leader of the direct sales/infomercial business in China, they do reach most of the country through their space on various satellite, local and terrestrial tv channels, and they do have deals with provincial distributors that have their products in about 20,000 retail locations, so they’re reaching a lot of people.
The company does both product development and direct sales, and distribution for partners — so they’ve built their own product lines (primarily the Ozing English learning computer, though also a line of cosmetics, some back support products, an electronic dictionary, and a variety of auto care products), but they also do direct sales and distribution for a number of other products, with a big focus on mobile phones. They don’t own home shopping TV networks, but they buy up ad space on many networks for their 5-10 minute infomercials.
And the market cap has actually fallen with the stock price recently, so it’s more like $120 million, no longer at $155 million … so despite the fact that the balance sheet looks so appealing, the stock’s going down — this pretty much never happens without a reason, but perhaps it’s not a good reason. So what’s the reason?
Well, despite Hsu’s optimism, they’re not currently knocking the cover off the ball in terms of sales — with a relatively small number of products making up the core of their sales, including mobile phones and the e-learning products and cosmetics, they are extremely dependent on having constantly refreshed and appealing products to sell, and the sales of these core products seem to go through some pretty wide fluctuations due both to the appeal of the products and the ads and, one assumes, to the underlying economy. The Ozing English language thingies they sell have been particularly weak recently compared to their expectations, and the company did say a few discouraging things about competition in the space in their last earnings release. Frankly, their products don’t look particularly intriguing to me, and it’s hard to believe you could build a successful, growing company on the back of these few items … but then again, I’m a really, really long way away from being their target customer.
Hsu’s teased snippets about the company seem to be a good match, but they certainly don’t tell the whole story — the teased numbers are from the much more appealing fourth quarter of last year, not from this most recent release. Gross margin was 48% in the fourth quarter, and indeed was right around there for all of 2009 on average, but that was down considerably from the 50-60% range in prior years. And when you see someone bragging about “gross profits”, you can be fairly certain that they didn’t have any “net profits” — gross profit was up 20% year of year in that quarter, but they still recorded an accounting loss for the quarter that was larger than in the previous year. In the first quarter this year the margin fell to 44%, and they lost money on an operating basis (though they earned three cents per share thanks to “other income”).
And yes, the shares are up 140% over the last 18 months … but that’s only because they collapsed briefly to under $1.50 in late 2008 — they bounced back almost immediately to the $4 range. This year brought a fair amount of optimism to the shares, thanks in part to their decision to issue a special dividend (about $29 million, part of the reason the cash per share is down to about $4 now) to return some cash to shareholders early in the year, and for a while the stock traded above $6, but the weak first quarter and the general concern about China and Chinese consumers have collaborated to bring the stock down to about four bucks.
Morningstar’s analyst, for what it’s worth, pegged the fair value of these shares at about $5.50 several months back, but did so with great uncertainty, suggesting a buy way down at $2.20. The company has issued guidance of roughly $300 million in sales for this year, and $12-14 million in earnings, a number that looks to be slightly above the consensus of the two Street analysts who cover the stock. In case you haven’t done the math, earnings of $12 million on a market cap of $120 million would mean that the shares are trading at an expected current year PE of about 10.
The company clearly is in a competitive business, with some weak performance recently, but you can certainly make a case for buying a profitable stock at roughly cash value in what should be a growing market — there’s no guarantee that the shares will see a boost on improved performance in the future, or on another attention-getting special dividend, but having this much cash on the books does certainly have the potential to muffle the impact of slings and arrows on a company’s changing fortunes. It is unusual to see stocks dip much below their cash value for very long before value hunters or activist investors pile in, there’s no guarantee that the stock will go up but, all else being equal, it probably should bounce back if it falls considerably from here (that “all else being equal” is, of course, a pretty broad disclaimer).
For more on the history of ATV, which has often at least looked undervalued in its three years as a public company, you might check out the value investing blog of Saj Karsan, who has been following Acorn International for a while and had some interesting comments on the stock last month.
And of course, if you’ve got a feeling on ATV, or on any other Chinese retail stocks … or, really, anything interesting at all, feel free to use the friendly little comment box below. Thanks!
Oh, and one little P.S.: Hsu ain’t kidding about the “little” part — a fair amount of the fluctuation in the stock could easily be from just one relatively large newsletter recommending it, and Hsu’s qualifies, and even the attention in this space from yours truly could easily move such a small stock … so if you are interested in this one, be careful, gains due to short-term attention like this from me and from Hsu can tend to evaporate quickly.
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