I still can’t seem to find any better values than in the chinese micro cap stocks. China Organic Agriculture is a chinese food products company that primarily sells rice and recently made inroads into the wine business. I was considering recommending this stock a couple of weeks ago, but it had already experienced a significant run up of around 100% after their last earnings were released. We are finally starting to see a pullback of the stock from its highs of $.50 to its close today of $.385, a decline of 23%. As many speculators on the Yahoo! message board for CNOA have discussed, the stock could continue to fall until its next earnings report, when it will likely get another boost. However, I think now is the time to at least start an initial position, which can be added to in the event that the stock falls further.
As with some of the other chinese micro caps, CNOA is trading at a deep discount to what you would expect for a company sporting its financial statements. Its book value is approximately $.72, leaving it trading a little over 50% of book value. That would make sense if the company was losing money or experiencing stagnating growth, but that is not the case. The last quarter showed revenues of $37M and profits of $4M or $.05 a share. That’s a forward P/E of less than 2 at the current levels. Current assets stand at $58M and current liabilities at $10M (excluding restricted cash and notes payable which offset each other and are linked). The company is extremely financially sound.
The company is primarily growing via its core rice business and via acquisitions, including a recent majority stake in a vineyard. I think one of the reasons that the stock price has not yet reflected the growth prospects associated with these acquisitions is that there is very little visibility into how CNOA will be impacted financially. Over the next couple of quarters I expect we will see significant growth in revenues and profits from these acquisitions and the stock will react favorably.
The other major issue for CNOA’s stock is the lack of confidence of shareholders in management. Management has had significant issues in releasing financial information timely. In the case of the last 10Q, it was issued late, causing a pre-issuance sell off followed by a strong rally when the encouraging financial statements were finally issued. Additionally, shareholders have received very little communications from management and their have been rumors that CNOA no longer utilizes its PR agency. This may stem from a prior shareholder lawsuit related to comments made by management and the subsequent drop in share price. However, as of today, the lawsuit has not amounted to anything.
I consider the potential to far outweigh the risks, especially at the current levels. Despite late issuance, the reecent financial statements were very strong and I believe they will only get stronger in the next few quarters. And if management ever gets its act together and starts providing visibility into its growth strategy and financial projections, the stock could easily triple. Even without that, however, I feel this stock will easily double within a year.
Recommendation: CNOA- Buy with a Target Price of $.80
Disclaimer: This is just my opinion, I am not a professional, do your own due diligence and consult with your own financial advisor and arrive at your own conclusions before you make a decision to buy or sell this stock. At the time of this post I held 20,000 shares of CNOA.
