“Why This Stock Could Jump 166%” Penny Stock Fortunes

Today’s teaser ad is for a stock in a sector that many Gumshoe readers are interested in: Water. The logic, after all, is always impeccable for water-related stocks: There will never be a substitute for water, there are few living things that can survive without it, and the global population is not getting any smaller.

There are dozens of experts who come out of the woodwork every now and then to opine that water will be the oil of the next century, or that the next huge wars will be over water and water rights — I don’t know if that will be true, but it sounds logical, right? Heck, I don’t know what I’ll wear tomorrow — my predictive skills are very limited.

This teaser is from the folks at Penny Stock Fortunes, and in exchange for your “free” trial to their newsletter, they’ll give you the details about this hot new penny water stock they’ve identified — your friendly neighborhood Stock Gumshoe, of course, will just dig out the answer and share it with you … free, of course (though if you’re full of gratitude I’m always happy to see new folks join the Irregulars).

So what are we told about this stock?

“We’ve recently caught wind of a small-cap water utility based in the U.K. The company provides water and wastewater services to more than four million customers in seven countries. The company’s international exposure is what makes it especially interesting for investors looking for high growth — by entering new markets, the company managed to grow its sales 10 times faster than the rest of the industry.

“Our unique water utility investment focuses on providing water services to developing countries with quickly expanding water needs. In addition to the U.K., the company has operations in South Africa, Indonesia, China, Chile, Panama and the Philippines….

“In China, a country where a quarter of the population doesn’t have access to safe water, the company secured two new projects that will eventually serve a combined one million people. It announced record new connections at its local subsidiary in the Philippines. And one of this utility’s biggest new South African customers is the new FIFA soccer stadium currently under construction — the stadium will be home to the World Cup in 2010.”

And of course, as I implied in the headline of this article, there’s a claim of huge returns to come …

“Why This Stock Could Jump 166%…

“Of all the small-cap water utilities currently trading, this company has the lowest P/E ratio….

“The average P/E for profitable water utilities right now is 23. For our small-cap utility to trade at the average, its share price would be $9.70 — a full 166% gain from where it is now.

“Part of the reason for that is the low profile the company has taken since it went public. This company’s shares weren’t traded on U.S. markets until the beginning on 2008, just as the stock markets were starting their yearlong descent. As more investors become aware of what this company is capable of, you can expect its share price to make its way back toward the $5-10 range.”

So who are we looking at here? Throw all those clues into the mighty Stock Gumshoe Thinkolator, and I can tell you that this is …

Cascal NV (HOO)

Get it, HOO? H2O? So not all the clever tickers were taken when this company went public in NY about 18 months ago. It is a very small stock, market cap of a bit over $100 million and nearly $200 million in debt, so although it’s got a footprint to rival mega-water stock Veolia Environnement (VE), with businesses on most continents, they don’t have nearly the scale … each of their dots on the map represents a fairly small project.

And it is, according to a quick look at the numbers, very cheap for a water utility stock — not based on yield, which at a bit under 5% is fairly average for utilities and low compared to some larger water comapnies, but based on their reported earnings. That’s not because their earnings have been shooting for the moon, however, it’s because their stock has been flailing. They went public just in time to catch some water fever in early 2008, but have been falling almost steadily ever since, they can thank their investment bankers for getting the public to buy the shares at about $12, and the stock did get up close to $15 in the months following their IPO, but at the March lows you could have picked up the stock for close to $2, and today it’ll run you just about $3.70.

Many of the global water utility stocks have underperformed the “equipment” companies like Flowserve (many of which also serve the oil and gas industries), and HOO in particular has done a bit worse than the big names like Veolia, but it has dramatically underperformed the “flight to safety” US water utilities like Aqua America. There are three water ETFs that generally follow the same track (FIW, CGW, and PHO), and on average they’re down something like 30% over the past year — HOO is down 70%.

So there must be something that folks don’t like about HOO — I don’t know if it’s the debt levels, which are large but probably not debilitating for a utility company, or if there is concern about their competitive positioning vs. their large competitors, or simply a lack of awareness from folks who were happy to forget about this IPO after it fell off the bottom of the chart. What do you think? Is HOO for yoo? let us know with a comment below.

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