Capture Future Trends: China, Inflation, Petroleum
By Glen Bradford
I became a peak-oil believer this year after reviewing the facts, my point estimate being early 2012 when everyone realizes we are in descent mode. For those keeping track, the top started in 2004. That said, energy costs are going to rise. Also, with global governments printing record amounts of money and future inflation mostly unavoidable, lots of investors seek protection in Gold. I’d like Gold if I didn’t think I could get higher returns elsewhere. So, I’m looking into oil companies located in the country with the marginal competitive advantage of lower production costs, China.
To say China Integrated Energy (NASDAQ: CBEH) has been growing top and bottom lines in the last 3 years would overlook how they’ve grown their top and bottom lines over 5-fold in 4 years. Maybe that doesn’t seem like much to you but let’s take that in the context that Global GDP historically grows at 3% and compare this to CBEH’s mind numbing 50% CAGR. It’s growing at more than 10x GDP growth. Funny thing here is that it’s priced as if they aren’t going to grow anymore. Oh, but wait — they’re guiding for this growth to continue and recently even raised guidance? Look, the best way to avoid loss in stocks requires that you pay a little and get a lot and this is one way to do just that.
China Natural Gas (NASDAQ: CHNG) is growing at a little bit slower growth rate than previously mentioned China Integrated, but they’re running stronger profit margins.
Gushan Environmental Energy (NYSE:GU) is a company that was recommended to me when I polled my readers about peak-oil. Since oil prices have come off their highs, the price of biodiesel has also come down significantly, crushing the profit margins of Gushan and sending them into the red. The stock price has followed suit and dropped from around $15 to around a 52-week low of $0.70, where it rests now. Note that in the three years 2006-2008, they averaged around $275M RMB or $40M USD in profits on increasing revenues. They currently trade at a $121M market cap assuming 166M FD shares. Assuming oil prices return to their recent highs, I believe that this could be one of those turn around plays you wish you knew about.
China Petroleum & Chemical Corp (NYSE: SNP) has also experienced the effects of lower petroleum prices, but is still operating well in the black. It’s crazy to me that you can have a multi-billion dollar company trading at such a steep discount to their intrinsic value. I believe that if you factor out the oil price spike of 2008, you’ve got a growing company priced for no growth. Granted, the growth rate isn’t huge, but that should be offset by the sheer size of the company. Larger companies have a tendency to hover closer to their intrinsic valuations than micro-caps.
I’ve updated my estimates for a company I’ve covered several times before, Longwei Petroleum (AMEX: LPH). When you break it all down, my numbers come out to non-GAAP $0.85 EPS in FY2011, which started 1.5 months ago. I’m also forecasting enough cash on the balance sheet to finance potential expansion similar facilities of a cost around $50M by mid-October — even without the warrants.
I want to do a quick brief on this widely misconceived notion on the premise that there are value stocks and there are growth stocks. That’s entirely the wrong idea. The value of future discounted cash flows is a function of their growth rate. Along the same lines, the intrinsic valuation of a company is a function of its future perceived discounted cash flows. All other things equal, a growing company should have a higher valuation than a company that isn’t growing. If you’re smart, you’ll blow this misnomer out of the water with me and buy growth companies at cheap valuations. Growth also protects you against loss because if the stock price goes against you and the company is still growing and you bought at a cheap valuation, eventually the stock price will catch up to that cheap valuation and you’ll be ahead again.
Lastly, if you follow me, I encourage you to add Zack Buckley to your list at least for the next couple months as he is traveling through China visiting a majority of my favorite companies.
Disclosure: Bradford and his investors were long LPH at the time of publication.