Opportunities In Out-of-favour Stocks

Dear Harl,
What makes the stock market interesting is that there are diverse views all the time with both optimists and pessimists believing that they are doing the correct thing. If all of them have the same views, we would have one gigantic panic buying or selling.
Regarding the current market situation, my personal views (and I do not expect many to agree) are as follows basing on observations of past bull & bear markets:

1. The Singapore market is currently undergoing another big correction after the last one in May 2010 – [European financial crisis]. Significant corrections are not unusual in a bull market. The current correction started with the Middle-East troubles and was followed by the latest accounting woes of China Hongxing and Hongwei which badly damaged the recovery of confidence for S-chips and penny stocks, as well as compounded the selling pressure on S-chips causing many of them to drop to unrealistic levels once again. The latest trading halt for China Gaoxian is likely to further damage sentiments and price recovery of S-chips.
2. Unless there is another financial crisis, worse than the last one, and leading to a serious recession or depression, it is reasonable to expect the STI to surpass its last record high of 3,800+ points (in due time) so long as inflation and economic recovery are present. In view of the current rock bottomed interest rates and the massive liquidity around, the odds of a repeat of the 2008/9 bear market scenario appears rather remote at least for now. 
3. In every bull market, there will always be rotational play starting with the blue chips and ending with the potato chips. When prices of blue chips have risen too substantially, it is usual for interest to spill over to the better second liners and penny stocks, and eventually to the “cats & dogs”. For those who are prepared to take calculated risks and have a sharp eye for undervalued, and fundamentally sound out-of-favour penny stocks, they are likely to reap very handsome returns from these stocks. The current deterioration of sentiments for S-chips is offering “risk takers” another golden opportunity to pick up low risks high potential capital gain stocks. For example, QINGMEI is now selling at around 25 cts with a likely dividend yield of at least 10% this year. A “risk taker” who buys and holds the stock for one year using Margin Account that charges 6% interest could stand to reap close to 4% dividend yield [after borrowing and transaction cost] plus potential capital gains. What if the capital gains do not materialize after 12 months? Then, cut loss and pay the difference as this is the calculated risks.

My response to Cheongwee’s posting is that when the S-chips, as a whole, have gone out-of-favour with investors, there are “gems” around for picking but only for the sharped-eyed astute investors. It is not a case of out-of-favour stocks being no good; it is a case of the stockpicker being no good. The reason a stock is out-of-favour is precisely because it is inactive for lack of interest regardless of the fundamentals of the stock.
An investor who desires to move one step ahead of the herd must have the patience or be prepared to wait for the herd to come charging in.

Calling out to observer2
what out-of-favour stock do you have in mind that you can share with us. So far i was earthquaked and radiated out of most stock ,except for UMS and innotek. LOL
I know disclaimer apply for all who read your recommendation. Everybody pls blame yourself for following OK? if not then dont follow. tell you first, it is s-chip OK.
Now over to observer2 .pls .I bought foreland and qingmei and sold for small profit.now u memtion qingmei. I like this. Thank.
your faithfully cheongwee

Hi, Cheongwee,
I have no intention to recommend any stocks for anyone to buy as I believe each one should do his/her own homework first before buying a stock, taking into account his/her risk appetite, resources and knowledge of the business he/she is investing in. However, I can share here where I am placing my bets [with a 20% probability that they could fail to meet my expectations].
My top 2 bets on what I considered to be very undervalued stocks with low downside risks & high potential capital gain within a 12-month timespan, are still –

1. Qingmei [24.5 cts]
2. Eratat [19.5 cts]

Hi Observer2,
I would just like to thank you for your very insightful posts on this forum and i find myself sharing many of your views, my current 2 largest holdings are also in Eratat and Qingmei. Buying companies that are trading at PEs of 3 and trading well below book value plus showing strong earnings growth and growth potential is like buying companies during a recession - generally the best time to buy. 
 
However, I would just like to ask you the following: Does the fact that Eratat and Qingmei are in industries in which there are relatively low barriers to entry concern you at all? Just want your opinion only. Thanks. 

Short term contra tradings could be fast but riskier and gains not big. A longer term strategy  investing in potential stocks is better to reap huge gains. There should be jewels in the boxes like Yangzijang, SunVic, Dyna-Mac and other dividend stocks including F & N.
Intersting analogy by Observer2 based on last worst event.  The ST index has since corrected and fallen to test crucial reflection point of 2,950 few times on the worst events like Japan Earthquake and middle east crises. But it has not dipped below 2,900 or 2,800 pts below where the world economy started to recover from the worst financial crisis. Maybe this is a good indicator for those who want to gauge the exist or entry point to the market.
 

One factor that is pushing me away from Qingmei is its prospectus. It says it is building a R&D center but I doubt it will be effective considering the foreign competitors like Nike and Adidas have years of R&D and patents already.
Second thing in the prospectus that is bothering me is it is asking for money to advertise to public. Soles are a generic product even with innovation, there is not really any point of advertising on your special soles, advertising should be done by the shoe makers themselves.