Newsletter Watch: Beijing bets
With 1.3 billion citizens benefiting from a growing economy, it's hardly a stretch to understand investor enthusiasm for stocks that combine "China" and "food." Add to the mix the buzzwords "natural," "organic" and "environmentally-friendly," and we have a pair of intriguing plays on the rise in demand by Chinese consumers for higher quality — and healthier — foods.
The first, China Agritech (Nasdaq:CAGC), is a distributor of fertilizer, and has products that are designed to be environmentally friendly. I would emphasize that with a market capitalization of just $57 million, this issue should only be considered by those comfortable with buying micro-cap stocks.
The second is American Oriental Bioengineering (Nasdaq:AOB), a player in the market for natural foods and herb-based products. The company is a relatively large play ($809 million market cap) among small caps in general.
Jim Trippon, editor of The China Stock Digest, says that "China Agritech is a relatively new and rapidly expanding player in the Chinese agricultural scene."
The company is a leading developer, manufacturer and distributor of environmentally friendly liquid organic fertilizers. "China Agritech's unique, proprietary fertilizers are the result of over 12 years of research and development," Trippon says.
The firm's ongoing growth strategy, he says, includes geographic expansion throughout China as well as exports to other Asian countries.
Listed in the United States in February 2005 through a reverse merger, Trippon believes that China Agritech is uniquely positioned to become one of the "leading" agricultural products companies in the People's Republic of China.
"Due to the continuing decrease in the amount of available farmland in the China, along with the projected increase in population, and the growing demand for organic foods around the world, there is a considerable increase in the use of organic compounds as fertilizers for safety, efficacy and environmental reasons," Trippon says.
The company has created a plan for expansion that the advisor feels will allow it to grow dramatically over the next several years. He says that the historically highly fragmented nature of the Chinese fertilizer industry has created a void in the reliability of fertilizer products nationwide and that the “lack of consistency among products creates an opportunity to position the company for growth.”
"By collaborating with academic and governmental institutions who will attest to the quality of China Agritech's current product offerings as well as developing new compounds to better meet the changing needs of China's agricultural community, the company believes it can expand rapidly in China and beyond," he says.
By accessing capital markets in the United States, he says, China Agritech will be able to launch an extensive advertising campaign to educate the farmers on the benefits of its liquid organic compound products.
"With a P/E of less than seven, China Agritech is a rare find in the burgeoning agricultural products field," according to Trippon. The valuation, he says, is a "bargain" compared to an industry average valuation above 38.
The advisor recommends buying China Agritech at a maximum purchase price of $2.30 or less, with a stop loss at $1.50. His target sell price is $4.50.
Mark Skousen, editor of Forecasts & Strategies says that "Revenues and earnings at natural foods play American Oriental Bioengineering are exploding like a Chinese firecracker.”
He says that the company has all the features of a "Warren Buffett-style success story" and thinks it’s a well-managed and fast-growing business that has a long-term competitive advantage in Asia.
The Shenzhen-based natural herb company sells vitamins, healthy beverages and over-the-counter drugs to treat various illnesses. It sells to retail stores, pharmacies and hospitals.
Revenues and earnings, he says, are expected to continue to grow at a 40% to 50% rate. Skousen says that American Oriental just recently announced a 50% increase in year-to-year revenues to $38.8 million, and a 46% increase in earnings to $9.4 million.
These gains, he says, occurred during the company's weakest quarter, seasonally speaking. "The good thing is that, despite the stock's recent run-up, it still is selling below its all-time high of $14 a share reached in the past year, and only 11 times next year's earnings!" he says.
The company recently announced that it has cancelled a stock offering, but the advisor says that "Perhaps shareholders criticized the plan, giving the stock a haircut. I remain upbeat about the prospects of this vitamin and natural drug company in a booming China and I suggest that you pick up some shares gradually."
Steven Halpern has just compiled a 35-page report on alternative energy, featuring the favorite solar, wind, nuclear, coal and natural gas stocks from the nation's leading financial newsletter advisors. The report is available for free to all Small Cap Newsletter readers.
About the Author
As a newsletter editor and financial journalist, Steven Halpern has covered the investment newsletter industry for 25 years.
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