Several months ago, I profiled a stock called China Marine Food Group (CMFO) and labeled it “my favorite small cap” at the time. The fundamentals were outstanding (and still are), but I grossly underestimated the negative cloud that surrounds most Chinese small cap stocks. Just take a look at China MediaExpress (CCME) if you are not familiar with what I’m talking about.
Turning the Corner?
China Marine Food spiked to above $7 after I profiled it from the $5 range, but has since bled lower to the mid-$3 range as investors lost interest and were unwilling to trust that the company and many like it were even legitimate businesses. However, last week, the stock got a huge boost after reporting strong fourth-quarter and full-year 2010 earnings.
For the year, adjusted diluted earnings per share grew 81% from the prior year and net sales jumped 76%. It’s a great sign that both sales growth and profit growth grew by a similar amount because it could indicate some chicanery if one is out of whack with the other. Gross margins expanded 300 basis points to 30.5% during the quarter as well.
“2010 was a transformational year for China Marine for several reasons,” began Mr. Pengfei Liu, Chairman and CEO of China Marine. “First, we entered a new growth business by acquiring ‘Hi-Power’ beverages in January of 2010. After incorporating improved labeling and packaging, ‘Hi-Power’ sales exceeded our expectations during its first year where we only penetrated the Fujian market.
The stock is exceptionally cheap at about 4.5x forward earnings, so there is definitely upside if and when the air clears. Value investors must be drawn to this stock and others like it, but they won’t commit fully until they are confident that the numbers are real.
What Does It Mean?
I am very pleased looking at these numbers for the quarter and apparently investors were as well as the stock soared over 20% on the news. However, the stock is still in the upper $4 range, and will take at least a few more quarters of similar results to meaningfully increase. Somehow investors have to feel more comfortable that CMFO and other Chinese small caps are real businesses with clean accounting practices. This quarter along with the market reaction was a great start and those who are patient enough to wait for the cloud to pass could make some excellent profits.
Speculation Station: Following Up On An Old Pick is an article from: 
