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Turn-Around
Story Anyone? A Chinese Cash Cow |
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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.
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Turn-Around
Story Anyone? |
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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.
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Ask
Your Kids Why The9 is a Cash Cow |
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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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