Tag - PTR

We're going to open the mailbag again today and take a look at a stock that I've received multiple requests to check out. And I'm pleased to say that SmallCapInvestor Daily readers are starting to send in some great picks. Today's company is China North East Petroleum Holding (AMEX: NEP) and it is an oil exploration company with 247 producing wells on 4 oilfields in Northern China. The stock is currently trading around $10.45 per share and with 25.9 million shares outstanding the company has a market cap of $271 million.

This is an interesting company that has seen its stock rise 410% over the last 52-weeks, but I think there is still more upside to come for shares. This is a good one to run through my eight step process for analyzing small-cap stocks that could put big gains in your portfolio. I outline this process in my book The Small Cap Investor, and also included it in a recent article that you can read by clicking here.

When considering a potential investment the first step is to look for sectors that are experiencing growth, and China North East Petroleum passes with flying colors. There is no doubt that worldwide energy demand is growing and the fact that this company is located in China, an economy I'm very bullish on, is a big plus. Remember that this is a country that posted 8.5% GDP growth throughout 2009 when many countries were contracting.

Also, this company benefits from less competition then independent developers in other regions of the world and the Chinese oil industry is relatively immature. That means there is a ton of room for acquisitions of private players as well as lease agreements with big dogs like PetroChina (NYSE: PTR), a company with a market cap of $225 billion. Either way, massive opportunities exist for top line growth for China North.

We don't need to follow step two which calls for screening stocks once we've found a growing industry since this company comes by reader request. So let's just move on to checking the fundamentals of China North East Petroleum's operation.

I like what I see here too, management was able to navigate a tough year in 2009 when oil prices plummeted to a multi-year low near $35.00 a barrel. The company increased production and expanded into oil drilling, all while continuing to post a profit. It's drilling expansion came by way of the acquisition of private driller Song Yuan Tiancheng Drilling. The acquisition was done in October at a time when prices for many assets were still deflated and it effectively transformed China North into a diversified oil exploration and production company. 

Another huge accomplishment for the company was securing listing in June on the American Stock Exchange which has helped to increase its visibility by leaps and bounds. Combine this with China North's participation in the 2009 Brean Murray China Growth Conference, and it becomes pretty clear that management is intent on raising the level of excitement about their company's prospects.

The fourth, fifth, and sixth steps are to evaluate this company's financial performance, earnings quality, and growth outlook. Again, I like what I see here which is solid performance, despite the hit to oil prices that I mentioned earlier. Analysts expect the company to earn $28.8 million in the fourth quarter of 2009 on rebounding oil prices. That performance will bring in around $63 million in revenues for the year, a modest 7% increase over 2008.

But 2010 looks to be a banner year for this company. Analyst expectations (based on an average price per barrel of oil of $65) are for China North to generate $117 million in revenue – that's an 86% increase largely due to management's strategic actions that I discussed earlier.

This revenue boost should result in earnings per share of $1.20 in 2010, a healthy 56% jump from the $0.77 EPS expected in 2009. With shares currently trading around $10.45 the stock has a current year PE multiple of 13.6 and a forward multiple of 8.7. This is cheap relative to others in the sector, even large-caps. PetroChina is trading at 10.4-times forward earnings, but is not going to have the same growth as China North.

As always, I recommend you do your own research which should always include reading a company's latest 10-Q (quarterly) and 10-K (annual) reports. But shares of China North East Petroleum are a buy in my mind, despite their rapid rise of late.

I'd love to say wait for this stock to pull back to its 50-day moving average around $7.60 before pulling the trigger, but the honest truth is that I don't see a catalyst that will send shares that much lower. Institutional ownership is increasing from 8% as of the end of the last quarter and is helping to drive demand even higher. The growth prospects are simply too attractive for China North East Petroleum and while gains shouldn't be expected on day one, this stock is sure to move higher in 2010.

As always, if you have a potential winner you think I should check out, just send an email to editorial@smallcapinvestor.com and I'll give you my thoughts in a future issue.

***It seems like it's hard to go wrong investing in high-growth small-caps in China, but that doesn't mean you can just throw a dart at a list of Chinese stocks and hit a winner. Research and fundamentals still matter even though many companies in the country are benefiting as the economy looks to grow by 8.5% in 2009 - a phenomenal growth rate given the global downturn. What's more, economists are expecting growth to rise to 9% in 2010.   

As you know, I was bullish on China throughout 2009. And my SmallCapInvestor PRO readers benefited with 81% and 94% gains from two of my top Chinese recommendations.  

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