Turn-Around Story Anyone? A Chinese Cash Cow

In our never-ending search to find our readers money-making trading ideas, we were glad to come across not one but two of them this week. We debated in saving one of them for later, buy hey - when the time is tight, the time is right. We like both of them right now.

One of them makes data storage devices, and the other is a Chinese video game maker. Both arenas have been hot lately. 
 

	Turn-Around Story Anyone?

There aren't too many things investors love more than a turn-around story ...a company that just didn't get it done in the past, but now seems to have found a path to better days. If Imation Corporation's (NYSE: IMN) chart is any indication, that's what the market sees with the company now.

To say 2007 was a disappointment would be an understatement. The company lost about $50 million, versus a profit of $76 million the year before. Ouch.

That's the past though. In Q1 of 2008, they produced a profit again. This is where it gets tricky though. That first-quarter profit? It was still 30% lower than Q1 from a year earlier. However, Q1 revenues were actually up by 25%. In other words, they were doing less with more.

Between then and now, they've taken a lot of fairly drastic cost cutting measures. So, anybody who's buying in now is basically thinking the recent cost cuts are going to work, without cutting off Imation's top line cash flow.

After our investigation, we tend to agree. That's not what got our interest though. We first noticed Imation based on something that had nothing to do with sales and profits. The stock got out attention because it looks like it's ending a year-long losing streak. That's a hint that other investors also see what we see ...better days ahead for the company.

Specifically, the stock is back above the 200 day average line - one of my simple rules of thumb. The accumulation volume has been quite strong as well during this recovery phase. And finally, if you zoom waaaaay out on a long-term chart, you'll see the stock's recent rally was started by a retest of a major support line (that goes back to 1997). 

Though it may take a while to get there - making this a bit of a longer-term idea - we feel IMN could get all the way up to $53 before serious resistance was hit. As the chart shows, that's about where another key trend line will be a few months from now. Just for the record though, we may lock down a respectable gain well before that target is reached, if something significant changes and the risk no longer justifies the reward.

As for a stop, $19.17 seems like a lot of room (and it is), but this volatile stocks needs it. If we get a good start on an uptrend, we'll probably raise the stop to protect any interim profits. You'll have to stay tuned for those changes.

Now, that was idea #1. We like idea #2 just as well. 
 

	Ask Your Kids Why The9 is a Cash Cow

Unless you're active in the world of online gaming, odds are you've probably never heard of a company called The9 Limited (NASDAQ: NCTY). You've probably heard of some of the games their licensed to 'operate' though, the most notorious of which is probably World of Warcraft - commonly just referred to as 'WoW'.

Basically, The9 Limited is licensed to host online video games where millions of players can enter a game via the Internet and compete or team up with other online players. Of course there's a nominal fee for access to the games. I believe you can pay by the month or by the minute. No matter - it's an incredible amount of recurring revenue, with very little input required by the hosting company.

If you have kids, ask them about the popularity of World of Warcraft. They can give you a feel for just how big this online community is. If you don't have kids, here's my attempt....

Though they're only licensed to host a few online role-playing games in China for Chinese gamers, the paying subscriber base is huge - as in millions of people. And, it's growing fast. Just for perspective, the top line grew from 34 million yen in 2004 to 1,279 million in 2007...37 times better. In Q1 of 2008, The9 raked in revenues of 439 million yen - their best quarter ever. So no, they haven't peaked yet.

In fact, the company is actually looking to expand their license with the World of Warcraft series so they can further boost the top line.

What about profits? No problem. Though I've seen bigger net margins than the The9's 19%, that's still pretty big. The edge this company has over other companies is a consistent margin around that figure for the last three years. Given the nature of the business model - recurring revenue - I don't see that changing anytime soon.

As for the stock, I like NCTY for the same reason I liked IMN - a year-long pullback translates into an undervalued company, particularly when the company continues to do well fundamentally.

The bullish volume behind the recovery has been growing, and now NCTY is back above its 200 day average. Yet, the stock could double from current levels and still not reach its 2007 high. (Sound familiar?) I think the span between here and there is relatively easy money, now that we have a little momentum behind us.

I suggest a target price of $35.14, for starters. That level seemed to be support as well as resistance in the fall of last year, so I don't feel it would pay to get too presumptuous just yet. If we're still going strong when we get there, we can rethink the target then.

As for a stop, I think $22.90 is an important line in the sand ...we've seen support and resistance there too.

We'll start following these two stocks on the site and in the newsletters. I think either or both of them could make the latter part of 2008 a little more fun, and a lot more profitable.

By the way, it's not just Chinese video gaming that's hot right now - many Chinese stocks are coming on strong. I don't want to say too much just yet, but we may have another Chinese stock idea for you in the not-too-distant future.
 

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