Joining the party in CHME.OB

[David Randolph]

As everybody else, I wouldn't mind joining the Chinese speculative party, if I don't see much risk in doing so and there's the real possibility of big profits coming to the Main Portfolio, which is near an all time high. I need all the help I can get before 2007 closes to reach or surpass the 30% profit mark for the year.

Yesterday night I saw something for the first time, which was StockLemon actually recommending a stock to buy, not just bashing stocks running high. I enjoy his research a lot and he's almost always right over the long term. I've confirmed all the facts mentioned in his recommendation and they're all true ... I think he's even being conservative, as I'll explain later.

The stock he recommended was China Medical Corporation (CHME.OB):

Citron covers China Medical Corporation

You can see from the following chart that CHME.OB is a recent IPO and yesterday was the first day of strong buying, with 2 million plus shares changing hands:



Today we also have www.**********.net joining the party in CHME.OB ... but I'm not going to walk way from this potential rocket just because "competition" had the same idea.

Fundamentally we're talking about a $40 M market cap company, with $23 M in revenues in 2006. In 2007, revenues are growing 105%, so we're looking at about $47 M in revenue in 2007. Net profit margin in Q2 2007 was an impressive 20.4%, which if maintained, will translate into about $9.6 M in net income for 2007. Apply a 20 times earnings multiple to this and get a $192 M market cap company, almost 5 times more than what it actually is now.

Read the full earnings report here:

• China Medicine Announces Second Quarter 2007 Results
PR Newswire (Tue, Aug 14)

On this spectacular earnings news day, nobody was watching ... the stock traded just 37,700 shares on that day and price declined 3.2%. On the next day it traded just 1,000 shares.

But now, after a 2 million shares day, everybody will see how deeply undervalued this stock is ... I see it climbing 100% very fast and more later.

Trading Plan:

Buy CHME.OB, 5% of capital.

[realcoolhead]

Strange, I got a message from IB that: "This contract can only be closed". 

[babouk]

I have this problem too

[David Randolph]

Strange, I got a message from IB that: "This contract can only be closed". 

I have this problem too

What? What's the problem with IB? Please call them ... they're known for not letting people trade OTCBB shares.

Others with other brokers, any problem? Thanks.

[AussieTrader]

TD Ameritrade OK.

[David Randolph]

I was able to buy it at $3.88 ... bad fill

Anyway, I hope you guys catch it on this dip (which I guess is happening because most China related stocks are down today, a short term thing).

[Dracull]

My broker is IB...And I'm beginning to think seriously in changing as I also can't buy this one.

[finagler]

No problem Scottrade

[David Randolph]

My broker is IB...And I'm beginning to think seriously in changing as I also can't buy this one.

If this thing goes up 50% today or tomorrow you'll sure want to put some money in another broker too Draccul. IB's problem is that it is a professional trader's broker, not very well suited for investors.

It's good for those who day trade stocks or futures, but to buy and hold stocks for the long term ... there are better alternatives. This issue with OTCBB stocks is a pain in the ass.

[David Randolph]

If this thing goes up 50% today or tomorrow ...

CHME.OB didn't go up 50% yesterday. Here's why, in my view:

«... were issued two series of warrants to purchase up to 3,694,738 shares of the Company's Common Stock at $1.75 per share ("Warrant A") and 3,694,738 shares of Common Stock at $2.50 per share ("Warrant B"), subject to adjustment set forth in the warrants issued to the initial investors dated February 8, 2006. Pursuant to a Waiver and Amendment  dated April 23, 2007 between the Company and the Initial Investors, the exercise price for Warrant A was reduced to $1.70 and for Warrant B to $2.43. As of the date of this report, the Company has 378,948 shares of Warrant A outstanding. As of the date of this report, no Warrant B has been exercised and the Company has 3,694,738 shares of Warrant B outstanding.»

At the date of this report, the $1.70 warrants were almost all converted, but we already had the 3,694,738 warrants at $2.5 to be converted. These investors have been holding these warrants since February 2006, that is, 20 months, so probably they were looking to convert and sell at least some of them, regardless of the fundamentals of the company, as they would probably want to diversify their investments.

Now it's fashion to make IPO's this way, the same thing happened with ASTI, I sold because of the warrants, and then had to buy the stock back 100% higher. I'm not going to make the same mistake twice.

CHME.OB has a very seasonal business, and this explains the big rise in inventories in Q2 2007.

Check here the historical quarterly revenue numbers:



And the quarterly EPS numbers:



Look at this incredible seasonality. The company had full year EPS of $0.63 in 2006, of which $0.55 were in the second half. In the first half of 2007 CHME already made $0.16 EPS, but it promises a lot more in the 2nd half, say, at least $0.7, even with the # of shares outstanding growing? This gives me about $0.86 EPS in 2007, which means the stock is trading at about 4 times earnings.

I believe this is possible because this is a recent IPO stock which had phenomenal growth, but investors didn't pay attention. Not until now.

I see several bags of profit in CHME.OB and I'm not going to be shaken out by any short term volatility coming from the exercise of warrants. The holders of warrants certainly know how undervalued the company is and they won't let go of all their shares at current market prices, just some to satisfy their short term needs.

Will CHME.OB rise 50% today? It should, it should ...

I'll keep holding CHME.OB.

[Garoh]

If this thing goes up 50% today or tomorrow ...

I see several bags of profit in CHME.OB and I'm not going to be shaken out by any short term volatility coming from the exercise of warrants. The holders of warrants certainly know how undervalued the company is and they won't let go of all their shares at current market prices, just some to satisfy their short term needs.
Will CHME.OB rise 50% today? It should, it should ...
I'll keep holding CHME.OB.

It could be David 

I put a limit order to buy this stock at $3.40 from the first day you recommanded it and it Filled a few minutes ago 

The chart says something will happen soon , probably will be the 50% rise 
Anyway , it's a good pick david

[David Randolph]

I put a limit order to buy this stock at $3.40 from the first day you recommanded it and it Filled a few minutes ago

The chart says something will happen soon , probably will be the 50% rise  Roll Eyes
Anyway , it's a good pick david

Thanks Garoh, congrats on the excellent fill

I made some estimates for my valuation model but I don't have time to explain them now, I'll do it over the next update:



Let's just say I expect CHME.OB to be a multi-bagger and my hands are as strong as they can be on this one.

[David Randolph]

Considering this:



... and this:

«"The second half of our calendar year is generally the strongest as customers build inventory to meet rising demand as we enter the winter season and approach the Chinese New Year," continued Mr. Yang. "With our broadened product portfolio we are well positioned to capitalize on this trend and anticipate that revenues and net income will show meaningful increases during the second half of this year compared to the first."»

... and the $0.63 EPS CHME.OB earned in 2006, I would say we're looking at least at $0.8 EPS in 2007 (because the # of shares outstanding increased due to warrants conversion, but that is almost over now - or else EPS would be $1 plus).

So CHME.OB is enjoying phenomenal revenue and profit growth, and it appears to be trading at about $3.4/$0.8 = 4.25 times earnings. Where's the flaw? I don't see it, I think this happened because the company's revenue growth and profit expansion was too fast, and since the stock was too illiquid, nobody was looking while the fundamental improvement was happening.

I attribute the current weakness to some selling of shares from converted warrants at $2.5, but I expect this selling pressure to dry soon. CHME.OB has all in its favor to make a very rapid 100% jump, if we make a new white candle and a new high above $3.90, you can bet on it with safety in my opinion.

I'll keep holding CHME.OB for the long term.

[Rmagos]

HELLO 3STOCKSONFIRE`S SPACESHIP CONTROL CENTER

CHME SPACESHIP CALLING
We have a liftoff
All of us on board so far so goooood

Hope calling you again from the moon

Good work David

[tokyopua]

For anyone who follows STEPS/G-Spot from EliteG/AussieTrader, today marked the reversal candle you would like to see to make a position entry expecting a Gspot breakout above the original level.  I am doubling my position at the open tomorrow.