“Warren Buffett Style 10-Bagger in China” Skousen

by Travis Johnson, Stock Gumshoe | July 25, 2008 2:33 pm

Taking a brief break from dissecting Ann Sosnowski[1]’s latest 13F[2] teasers, we move along to look at one that just started cropping up in my inbox from Mark Skousen[3] and his Forecasts and Strategies newsletter. I’ve looked at lots of Skousen’s teasers before — he has picked some good ones like China[4] Medical, which he has been consistently touting for years, some middle-of-the road performers like Novartis, Vale, and ABB, and a few significant decliners like Southern Copper, Volcano, and Chalco. In other words, he’s like most of them — some winners some losers, though unlike others his ads often try to predict earnings surprises and resultant big prices pikes … unsuccessfully, much of the time.

This time he’s not necessarily promising that the next earnings release will be a blowout, but this Chinese firm will be releasing earnings in a couple weeks. So would you like to pony up your hard earned cash to get a copy of his special report, “”Windfall Profits with This Warren Buffet-Style Ten Bagger Set to Explode.”

No? OK, then, read a bit more of the Gumshoe’s gabbing and I’ll give you the answer.

For those who don’t know, ten-bagger is a stock that goes up ten times in value — the term was coined by Peter Lynch[5] in one of the all-time investing classics, One Up on Wall Street (read it if you haven’t). So that sounds good, right? Most of us would be happy to find one of those in our investing lives, and to hope to have the stomach to stick with it all the way through.

So has Skousen really found one for us here?

The clues, please:

“The company is a China natural herb business that sells vitamins[6], healthy beverages, and over-the-counter drugs to treat various physical and mental illnesses.

“They sell their products directly to retail stores, pharmacies, hospitals, and independent distributors in China and around the world.

“Just last month, the company announced first quarter results… and their numbers exploded upward like a Chinese firecracker. Revenues increased 51% to almost $40 million and net income rose 46% to over $9 million!

“And guess what the CEO told shareholders…

“We completed the first quarter of 2008, which is always our slowest sales quarter of the year, with a strong financial performance. We are well-positioned for 2008 as we begin to recognize the benefits of our… strategies.”

“As is the custom in China, the CEO is just being modest. What he didn’t tell you is that his company boasts high insider ownership of 42%, net profit margins of 27%, and expected sales growth of 49% until at least 2013!”

Well, that’s a nice, full plate of clues. I’m tempted to dig in a bit, but lets see what else Mark tells us about this company …

It’s well below it’s all-time high, hit last year.

Earnings per share have been growing at 25% annually for three years.

And the PE ratio is below 30.

So … opening the envelope now, the Thinkolator says …

American Oriental Bioengineering (AOB)[7]

This is a company I sniffed around once or twice last year, but have never owned. Sort of in a similar business to Skousen favorite CMED in that they’re both health-related and Chinese, but this one is a manufacturer of traditional Chinese medicines (CMED is a medical device maker).

Skousen even cites one of his competitors, which is a little unusual, saying that “In fact, The Motley Fool[8] considers this company one that could ‘approach greatness’ in the long run… and so do I!” That’s a quote from an article from a week or so ago[9] regarding the popularity of AOB in the Fool’s “CAPS” system of social stock picks, but it’s also true that AOB has been a recommendation of the Fool’s Hidden Gems[10] service (don’t know at what price, or which analyst), and Hidden Gems has certainly had an enviable long term record.

Is AOB for you? Well, it is even cheaper than Skousen cites — the forward PE of 9 and PEG ratio of .3 put it firmly in the “value” camp, though that’s not so unusual for Chinese companies at the moment, since many people are skeptical of the growth of many Chinese companies and demand a bit of a margin of error in the current market climate. And there aren’t many analysts looking at this one, but they have been pretty good of late — the earnings have come in very close to estimates over the past year. The trailing PE is also eminently reasonable at 15, since we’re talking about a company that has consistently reported 50% sales growth in recent quarters.

AOB is the stable old company in this little sector, at least on the public markets — they have a wide variety of products, and have a decent market cap of $700 million or so. Other little companies here sometimes have much lower valuations even than AOB and are dependent on one or two products, like Tongjitang Chinese Medicine (TCM), which has a trailing PE of 6 but was probably called “dirt cheap” back when the PE was 10. So I’d want to learn a bit more about the company before investing, since there’s no guarantee that a cheap stock will ever stop being cheap.

Oh, and do you remember Bill Mann[11]’s “State Sponsored Enterprises” teaser ad of a little while back? I hadn’t gotten to all of those yet, revealing only the Steel company they liked (which was GSI, also beloved of Navellier), but one of the SSE’s was also American Oriental Bioengineering — AOB actually excerpts the Global Gains writeup on their own website if you want more information about the company (pdf file)[12]. Bill Mann also helps run Hidden Gems, so this is probably similar to the analysis that those subscribers received.

I must admit to being tempted here, though I’ll want to spend some time looking over the company and getting to know their products and prospects first … if you have an opinion on AOB, feel free to share.

And I must say, it is nice to see more China stocks looking cheap again …

full disclosure: I don’t own any stock mentioned above, but I remain a shareholder of Berkshire Hathaway … even though I’d be surprised if Warren considered this a “Warren Buffett[13]-style” stock.

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