This one was sent in by a reader, along with a suggestion for the solution (which, as so often with the Gumshoe’s readers, appears to be correct). It’s from Mark Skousen in the form of an ad for Forecasts and Strategies, and, as you have guessed from the title of this note, it’s about a Chinese company with a monopoly position in some kind of metal.
As Skousen’s ad screams at the top: “SUPPLYING 93% OF THE MOST CRITICAL METAL IN CHINA’S EPIC CONSTRUCTION BOOM, A WESTERN COMPANY THIS DOMINANT WOULD BE TARGETED WITH ANTI-TRUST LAWSUITS. BUT YOU CAN BUY THIS CHINESE CASH COW FOR ONLY NINE TIMES EARNINGS.”
Ok, so China … 9X earnings … trades at half of book value … 93% market share. That sounds pretty good. What are we talking about here?
It went public “six years ago” and has “soared 598% since.”
The yield is 3X the average S&P yield, and dividend has risen 12X.
Where do I sign up?
The final teaser: “In my 27 years of scouting out special situations for my Forecasts & Strategies investment advisory, I’ve never seen another stock with so many things going for it. It’s exactly the sort of locked-in profit play I’ve spent my career looking for.”
That kind of language would be more powerful, frankly, if most advisers didn’t include it in EVERY SINGLE TEASER that they send out. Doesn’t anyone think the second best idea in the history of the world might also bring a profit?
But I digress.
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So, do you want to “lock in your profits with China’s legal monopoly?” If so, you’ll want to be taking a gander at …
Aluminum Corp of China, often called Chalco (ACH)
Yahoo Finance thinks the PE is 3.5, and Google Finance believes it to be 14 … so if we split the difference, in true scientific fashion, we get pretty close to 9 for their multiple. We could also assume that Skousen’s data is a little bit old, or that acquisitions are screwing things up here. The yield remains quite nice, at right around 6%.
ACH has been on an acquisition tear, picking up pieces of other companies and consolidating its core business and, most recently, offering to buy out Peru Copper, which certainly means that they’re moving beyond just alumina and aluminum (or, for my delightful British readers, aluminium). They do have roughly a six-year history, with the creation of the public company in the Summer of 2001 when the PRC essentially floated a a bit more than half of the government-run aluminum industry on the public markets.
Despite a very fast run up over the last couple months, ACH still seems to trade at a discount to Alcoa, even with all the recent takeover hype and speculation in the aluminum sector and among big miners in general. And just as a point of interest for folks who were interested in the “secret IPO” teaser about Lenovo and in the idea of riding the boom in Shanghai IPOs somehow, ACH also nearly tripled in its first day of trading on the Shanghai exchange back at the end of April, which had an immediate impact on the US ADRs and HK shares of … almost nothing.
But, it has more than doubled this year, and tripled in the last 12 months. That kind of fast action might always serve to remind us that it’s certainly possible for the shares to move the other direction just as fast. I’m inclined to agree that it’s a compelling story, but don’t know if I’d feel comfortable buying up here near $50. There are also rumours that Chalco itself is an acquisition target, which might also be fueling part of this gain.
Though Skousen has steered us in the right direction in the past, notably with China Medical a few months ago, I’m personally a little bit leery of investing in the big Chinese state-owned operations (though I have done so in the past with PetroChina).
Chalco certainly has a pretty long history as an ADR, and is a very profitable company, but I can’t help but think of the implications of the Chinese government’s 40% stake. To me, that means two things: 1, they are not known for pushing for corporate efficiency, especially at the cost of social goals like job creation; and 2, a related point, they have goals that are not necessarily in line with the average investor. Many state-owned companies in China, especially in the mineral and energy sectors, seem to me to be focused at least as much on increasing China’s access to reserves as on making profits. Lately, those two goals have certainly converged, but I have no idea whether they will continue to be in alignment.
That is, of course, just my opinion, though I do know that some other advisors like Robert Hsu tend to shy away from the big state-owned companies in China. Based on the numbers and on the growth of the Chinese economy, it’s pretty hard to argue against this pick by Skousen — and if memory serves, he’s been talking this one up for at least six months, so he apparently liked it at $20 and continues to like it at $48. Time will tell, I suppose … What do you think?