“Retire on this one hot stock… American company making China’s dirty water problems vanish”

Chinese water teaser idea from Mitchell Clark

OK, fine, we borrowed that headline from a teaser ad and we can categorically state up front that you will not be able to retire on just this “one hot stock.” But that doesn’t mean it mightn’t be a useful part of your portfolio — so let’s try to separate the stock from the hype and figure out who it is, shall we?

The ad is from Mitchell Clark, a busy bee over at Lombardi Publishing who we’ve written about a few times — this time the ad is encouraging you to sign up for a subscription to his Micro-Cap Reporter, and if you pay to subscribe you’ll get your “free” copy of the special report called China’s Great Water Crisis Winner.

So who is it? To find out, let’s dig into his pitch a bit and sniff out the clues. Here’s how he gets us interested:

“Retire on this one hot stock!

“Already controls 17% of the $20.0-billion global water treatment market.
“Now ready to help the 980 million Chinese drinking polluted water…

“How a little-known 64-year-old American company is making China’s dirty water problems vanish for good

“This could be the longest-running blockbuster I’ve ever uncovered. Be advised to take immediate action!”

Sounds pretty intriguing, no? China absolutely has severe water problems due both to actual shortages (relative to population and agricultural demand) in the North, and to severe water pollution in the South and many of the major urban areas. The factoids are pretty widely known: essentially all of the rivers are heavily polluted, many cities process little more than half of their sewage before discharging it into waterways, extremely heavy fertilizer use impacts more rural areas, Chinese food security is at risk from desertification in the north as water is diverted to population centers … etc., etc. Throw in an occasional drought, an industrial accident that causes even more pollution, and some public demonstrations by local residents and farmers, and you can see how precarious the situation might be for this massive and rapidly urbanizing country.

So, the argument goes (and yes, this is an argument we’ve heard many times over the last five years — and one I agree with to some extent), there ought to be a lot of money made by the companies who can help China to clean up its water. That’s a pretty big picture argument, encompassing everything from new wastewater plants to better fertilizers to environmental cleanup to water distribution, pretty much everything you can think of in the business of finding, moving, using, cleaning, and reusing water.

Which stock, then, is Mitchell Clark pitching for his newsletter? Let’s get into the clues:

“In February 2011, it was revealed that China’s water crisis is twice as dire as previously reported. (Beijing’s 2007 report ‘forgot’ to account for agriculture waste water, even though 65% of China’s water is used for agriculture.)

“With that disturbing news igniting Beijing into aggressive action, I’m twice as excited about the profits I see headed our way from my top pick….

“And the innovative water-treatment company I’m going to tell you about is in line to see sales explode this year, next year, and for years to come…thanks to China’s monumental water crisis.”

Ooh, ooh! Tell me! Tell me!

“China’s Great Water Crisis Winner

“Surprise: It’s an American company! …

“A 50% pop in share price looks to be right around the corner and the main reason is: this company’s moneymaking opportunities in China are immense.

“Its business in China is exploding!

“You’re not investing in mere potential here. This little-known American dynamo has been in China for more than a quarter of a century! And the revenue it gets from China has, according to Barron’s, ‘… jumped by more than 25% a year in the past decade.'”

Sounds impressive, no? Especially if it’s an established American company, which means that hopefully we won’t have quite as much concern about accounting inconsistencies or fraud hitting the share price, as we have seen with the broad brush that has hit just about every Chinese small cap reverse merger stock (including water-related picks like Duoyuan Global Water (DGW), which has been in a trading halt for almost two months and seen mass board resignations — unfortunately not so rare these days, almost all of the trading halts at any given time are of Chinese small cap stocks).

Some more clues?

“The $130 million in revenue hauled in last year from its China operations is on track to rise about 30% this year. And management is targeting China revenue to reach half a billion dollars by 2015…

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“The company went public in 1947 and has had a presence in China since the early 1980s. It already controls 17% of the $20.0-billion global market for water treatment, and 10% to 15% of China’s water-treatment efforts, leaving room for tremendous gains where it is most demanded.

“The stock has already climbed 44% since September. And, as I said, another 50% surge is at hand for investors who own this stock today.

“Now, the company has offices all over the country, including Hong Kong and, of course, Beijing.”

Sounds like enough, right? Well, we get a few more clues from Clark, just to be sure … he tells us that the key to “Winning in China” is that you have to have good networking connections, and this company apparently just improved their connections …

“… position just got stronger with the recent hiring of the former head of Asian operations for Eastman Kodak, who also happens to be a Beijing native, naturalized U.S. citizen and the one-time head of the U.S. embassy’s commercial-affairs department in Beijing.”

So … other than the hundreds of billions of dollars that China will need to spend to clean up water over the coming decade, that’s what we learn … who, then, is the company Mitch Clark is teasing?

I took all those clues, shoveled em into the hopper of the Thinkolator, and our answer came out clear as day: this is Nalco Holdings (NLC)

And yes, the investment thesis in this teaser from Clark appears to be lifted largely from the Barron’s article that he quotes — not that he actually plagiarized it, but that the argument and the background are very similar, even the focus on networking being critical and the impact that the former Eastman Kodak exec has had a big impact on Nalco’s China ambitions. You can see that full Barron’s article here if you’re interested, it ran in September of last year. The stock price, interestingly enough, is almost the same as it was then — NLC is right around $27 right now, right where it was last fall. The shares climbed to about $32 over the winter and have come back down fairly gradually.

But what Clark doesn’t quote from the Barron’s article is probably equally important — Nalco is definitely getting growth from China, and their China sales have slightly higher margins than their sales in more developed nations … but China is still a tiny part of their business. Here’s a fuller quote from the article:

“Nalco has operated in China for more than a quarter- century, and the revenue it generates there has jumped by more than 25% a year in the past decade. Last year, China accounted for about $130 million, or 3.5%, of total revenue of $3.7 billion, according to Eric G. Melin, Nalco’s executive vice president for Asia, based in Shanghai. This year, sales in China are on track to rise more than 30%, and management is targeting annual revenue of $500 million by 2015.”

Good stuff, to be sure, but even if they hit their targets and the rest of the company grows at the annual 15% clip that analysts expect (that’s a big “if,” of course, growth rates several years out are impossible to estimate very accurately), then Nalco’s overall revenues will be around $8 billion in 2015, and that $500 million in targeted Chinese revenue would make up about 6% of sales. So yes, China is growing in importance for the company, and that will probably continue, but it’s not just — or even primarily — a “China story.”

Nalco, incidentally, was a Warren Buffett story years before it became a China story — Berkshire Hathaway bought shares of the company in 2008, an