Opportunities In Out-of-favour Stocks

Hi, Ethan999,
Having gone through many market cycles, I have never seen so many good penny stocks with such low valuation as at the present time – all thanks to the many S-chips stock scandals, the recent fear of EU financial crisis & the fear of a double dip recession in US, as well as the continued lack of interest for penny stocks especially S-chips. 
“CRISIS” is “DANGER + OPPORTUNITY” as the Chinese language says. Since stock market valuation is normally at its lowest level when fear reaches its highest level, it is up to each individual to capitalize on opportunities that come along. What goes up must come down, and what goes down must come up, provided it does not vanish or die. Although blue chips are usually good reliable performers in a market turnaround, they can never achieve the big percentage gain that the penny stocks are capable of achieving (High Risk, High Gain). I believe we would be seeing again, a great number of penny stocks doubling its share price, when rotational interests eventually return once again to the second liners and penny stocks.  When will this be? Your guess is as good as mine but it would usually be after the blue chips have had their run up.
Unless there is a widespread economic recession or depression, I am optimistic that penny stocks like Eratat, SinoGrandness, Qingmei and many others, are likely to give good capital gains when the time comes. My guess is that this may likely occur in January 2012 – TRADITIONAL NEW YEAR RALLY, if the current bearish market continues its run.
I am placing my bet on Eratat to give a capital gain of 50% (13/14 cts to 21 cts) within the next 6 months taking into account the following points  –
1.       EPS for Eratat for FY11 is expected to be at least 7 cts(S) giving a PE of 2x or less.
2.       SIAS Research has given Eratat an intrinsic value of 32 cts in its latest report of 6 Sep.2011 for this stock following its visit to Eratat’s 2012 Spring/Summer fashion collection show on 30 August 2011. Eratat has since enlisted the help of Italian designers to raise its fashion design level and branding in the Chinese fashion scene. The latest trade show (product launch) was attended by more retailers and fashion reporters. The order flows resulting from the latest trade show would provide a good indication of its likely revenue and profits for 1H 2012.
3.       Ease of monitoring the likely performance of this company from its bi-annual trade shows.
4.       Eratat’s share price has been on the downtrend for the past 8 months and its downside is now very limited as can be seen by its little price movement each time the STI plunged more than 50 points.
SinoGrandness has a fairly impressive track record, especially over the last 2 years -
FY ……………  Turnover    …………..  Nett Profits
2007                 RMB 257M                RMB 41M
2008                 RMB 330M                RMB 55M
2009                 RMB 450M                RMB 66M
2010                 RMB 645M                RMB 116M – EPS 44 cts
[1Q11               RMB 177M                RMB  31M  - EPS 11 cts]
[2Q11               RMB 283M                RMB  54M  - EPS 20 cts]
2011 (1H)  -            RMB 460M                RMB  84M  - EPS 31 cts
FY 11 (Est)             RMB 920M                RMB 168M – EPS 62 cts
The management appeared to be shrewd business people who could think out-of-the-box. Instead of producing the common orange juice as one of its products, they had decided to go into producing loquat juice, a health beverage that has fast become very popular with the Chinese consumers. Furthermore, loquat fruit is produced only in certain areas in China and SinoGrandness’ first mover advantage has placed it in a solid position in this business. According to the Company’s 2Q11 report, SinoGrandness is now expanding its presence into other provinces of China. Its beverage segment is fast becoming its largest revenue contributor. DMG has a target price of 76 cts for this stock. I believe the odds of achieving a 50% capital gain from this stock within the next 6 months is equally good. Please do not believe all that I say here without doing your own homework and calculation. I take calculated risks, which many would frown on.
May you have a profitable season, Ethan999.
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[ethan999 26-08-2011]:

Hi Observer 2,
 
We haven't heard from you in a while. What are your current views on Eratat and Sino Grandness?
 
 

hi observer2 and ethan999 and everyone: Do u think we will see a rally by year end? A sustained rally?
I am starting to turn positive (after being highly bearish) as I am seeing a spectrum of political leaders and finance leaders taking action, and getting together and working together.

No doubt the stoopid US & Euro issues are massive, but if the action taken to address them gains momentum ... voila! that's all that's needed to send stocks climbing.

It's a forward looking market, as we all know. So that's why i think the equity market will change direction and move higher from here. I am going to put down $ on  a rally  by year’s end. What you guys think?
 

Dear All,
Just a personal opinion, I would advise caution at this point in time. Most of the fund managers that I spoke to have cash up over the past 6 months and they remain concerned on the rising volatility in the market.
The market is full of liquidity. But nobody dares to invest now. FEAR has overcome GREED in this case. It is not a matter of fundamental in play.
The present environment is not a market correction. It is the start of a change in global trend. And personally, I feel this is a down-ward trend that is going to last for years.
The small players are in for hardships. Better go for those with cash and strong operating cashflow to tide them through the winter ahead.
For stock picking -- I am buying S-chips which I view have strong potentials for delisting from SGX.
 
 

Personally I never try to predict the market as a whole.  There are far too many variables and unknowns involved in the market and these variables often have different degrees of effects on the stock market at different points in time. The macro-economic picture is too complex and multi-faceted for any single individual or organization to be able to predict reliably more than 50% of the time over an extended period. As individuals all we can do is focus on the fundamentals and financial ratios of individual stocks and ensure that we have enough cash to load up more of the companies which have fundamentals we believe in if and when the market goes down.  
For example, people say that there are many problems in America and Europe. For Europe, fair enough - if you take a look at many European stock markets, they are close and some even below their March 2009 lows, meaning as low if not lower than the levels they reached during the bottom of the most severe recession since the Great Depression.
What about the Dow?  Take a look at these stats.
Dow:  31st December 2010: 11577    16 Sep 2011: 11509   -0.59% YTD
STI: 31st December 2010: 3190     16 Sep 2011: 2789     -12.57% YTD
Shanghai Composite: 31st Dec 2010: 2808    16 Sep 2011: 2482     -11.61% YTD
S-Chip Index:   31st Dec 2010: 327      16 Sep 2011: 235   -28.13% YTD
The dow essentially flat but Chinese and Singaporean stocks down significantly? Wait a minute, aren't all the problems in America and Europe. Now if you look at the above stats alone with no knowledge of the global macroeconomic issues, you would naturally think that there is a recession or at least a slowdown going on in Asia but that the American economy is doing just fine! In fact economic statistics show just the opposite, that there is a slowdown and anemic growth in America, but Asia as a whole and in particular China are still growing very strongly, with China in particular growing at about 9%.
This is a great example of what I’m trying to say. First of all you cannot predict macroeconomic issues and factors because there are too many complex variables involved. Secondly, even if you could predict the complex variables, you cannot predict the precise effect it would have on the stock market. Why with all the gloom about the West have Singaporean and Chinese stocks fallen far more than American stocks this year? Wasn’t America the one that barely managed any growth for the first half of 2011?
When the market goes down, you would naturally get many fund managers/investors telling you they are staying cautious and freed up cash. However, this seems an almost disingenuous statement because it is precisely because many fund managers and investors were bearish and have pulled out of the stock market that the stock market has gone down – this is therefore a statement after the fact. If more fund managers/investors were more bearish, the market would have fallen even more. What’s going to happen in future with the macro-economy is always 50-50, if it was 65-35 the market would have moved in that direction, priced it in and it would be 50-50 again.
You can’t predict the market as a whole but you can analyze individual companies and their sectors/industries. What I do know is that in the long run earnings are what drive value. Take a look at these stats.
S&P 500 earnings in 1960: 3.1 billion      S&P Earnings in 2010: 83.66 billion   Up 2599%
S&P 500 in 1960: about  55      S&P 500 in 2010: 1257       Up about 2185%
It’s intuitive and it makes sense. Value is dependent on ROI and ROI is dependent on earnings, current plus future.
Pick the stocks which you believe have good fundamentals, low valuations, good growth potential, and in industries/sectors/countries that you like. At the same time, always keep some cash to stock up more of these companies if valuations go even lower because of global-economic headwinds.
Right now, the profile of companies that are attractive to me from a fundamental and valuation standpoint with significant growth potential is Chinese companies focused on domestic consumption growth, particularly those listed over here and some of the smaller ones in HK which are currently trading at very low valuations. I will not use up all my cash to buy them all at once, I will always keep more cash just in case the broader market drags them down, but these are the companies I will continue to focus on now based on fundamental valuations. In the long run, they will return to fairer valuations based on earnings. If these returns to fairer valuations are accelerated due to buyouts/privatizations, as will undoubtedly be the case with some of these companies, then all the better. 

Hi, Dele,
I will answer your question first before giving my personal views (which could also be wrong) on the current state of the market.
I expect the stock market to have at least a small rally, if not a huge one, in January 2012. Over the years, January is the month where a traditional New Year Rally is often expected to take place. Would this occur again? I believe the odds of it occurring are high because the market has been continually on a downtrend from January this year without any broad based rally. A year-end rally seems unlikely because of the current complex problems with EU and US that could take some time to resolve but one can never be certain as the market is irrational and can always spring a surprise.
The current market behaviour is unprecedented in the sense that it appears to be developing into a serious bear market scenario without passing through the normal phases and character of a typical bull market. This has confounded many analysts, fund managers and investors causing a diversity of views. What then is the correct answer and how should investors react to the current scenario?
My personal view is that it is for each individual to decide taking into account his/her resources, investment objectives & strategy, risk appetite, temperament and comfort level. What is good strategy for one person may not be so for another. I agree with Ethan999 that one should always have some reserve fund to take advantage of any further drop after buying. If a stock is considered fundamentally good and “cheap” and is perceived to be in a business that could continue to flourish, it is definitely worth buying more at cheaper price. My past experiences have taught me that one is also unlikely to be wrong for buying when stocks (also commodities) drop to a “cheap” level accompanied by most people being very fearful of buying because of the possibility of a further drop in price. Have stocks fallen to a “cheap” level? I believe many penny stocks have valuations that are already at that level and if they do not vanish or go into demise during the bearish season (all investments have risks & require careful study), a few of them might even become “multibaggers” when the bull market eventually returns. I may seem too optimistic but my optimism is based on the following facts:

1. Assuming the EU & US problems deteriorated into financial crisis, economic recession and bear market, how much lower will the stock prices drop? AFTER THAT, WHAT’S NEXT? The answer got to be – THE START OF A NEW BULL MARKET.
2. NO ONE KNOWS WHERE IS THE LOWEST OR HIGHEST PRICE OF A STOCK UNTIL AFTER HE/SHE HAS MISSED IT [Alternatively: EVERYONE KNOWS THE LOWEST OR HIGHEST PRICE OF A STOCK AFTER HE/SHE HAS MISSED IT]. It is therefore a futile attempt to wait to buy at the bottom or sell at the top price.
3. Markets do not die. It is always the unfortunate punters and speculators who die. In every crisis or bear market, there will be those who would become pauper and those who become rich. Investments require wisdom not just luck.

Hi
I have got Qingmei, Foreland.
Can pls list some here for us to consider. I know disclaimer apply. 
thanks.
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[MacGyver 17-09-2011]:

Dear All,
Just a personal opinion, I would advise caution at this point in time. Most of the fund managers that I spoke to have cash up over the past 6 months and they remain concerned on the rising volatility in the market.
The market is full of liquidity. But nobody dares to invest now. FEAR has overcome GREED in this case. It is not a matter of fundamental in play.
The present environment is not a market correction. It is the start of a change in global trend. And personally, I feel this is a down-ward trend that is going to last for years.
The small players are in for hardships. Better go for those with cash and strong operating cashflow to tide them through the winter ahead.
For stock picking -- I am buying S-chips which I view have strong potentials for delisting from SGX.