Short Term Outlook for China Energy Recovery (CGYV) Trades
Well, as I alluded to in this morning’s newsletter, the actual announcement of the news is creating less buying inspiration for China Energy Recovery (CGYV) than we saw prior to the news. It’s not been a bad day - the stock is basically flat. However, volume is on track to be considerably lighter, and the upward momentum has obviously taken a break. So, as promised, I’ve got some direction for anybody who’s currently in a trade.
If your only goal was a short-term swing trade, and you got in on Tuesday or Wednesday, I suggest you go ahead and get out. There’s a bit of a market for you, but it just doesn’t look there’s much gas left in the tank for this trip. Take the bird in the hand and move on.
Why that stance? Like I said, volume is the key…there’s not much of it today, and there’s no bullishness either. If the news was going to spark further gains, it would have done it right out of the gate (on stronger volume). Just consider yourself lucky we’re basically where we left off on Thursday.
If you’re in a long-term position, I don’t think you need to bother doing anything besides preparing for some sort of minor pullback. There are profit-takers waiting in the wings. Though they aren’t taking action today, I still sense they’re out there. No big deal…they shouldn’t create too many problems.
If you’re still thinking about getting into a long-term trade, I don’t know that I’d bother just yet. See the previous paragraph for why. I’m not bearish per se, but I suspect we’ll see CGYV shares trade a little lower before too long, to burn off some of the froth left behind by a 76% gain in two days. A decent dip is a good entry opportunity (though it would be much easier to buy on the way up than on the way down).
As far as timing all of this is concerned, we’ll have to watch the chart one day at a time. ‘The dip’ may be Friday, or Monday, or maybe even later today. I’m also not sure how big it will need to be. The right dip is kind of like talent….you’ll know it when you see it.
However, I’ll also remind you that China Energy Recovery will be presenting itself at the Rodman & Renshaw Investment Conference on November 10th (Monday), and will be at the Westergaard Conference on November 12th (Wednesday). Both venues will introduce CGYV to some new potential high-level buyers, so don’t be shocked to see some more high-volume rallies next week…if those funds and money managers like China Energy as much as we do. That doesn’t exactly leave the ‘dip’ window open for very long, but that’s actually a good thing.
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Any thoughts on the new facility? Is it a production facility too or just R&D? Thanks!
Editor’s response: I think it’s mostly/entirely R&D, but it was even R&D that was already being done. So, in my eyes, it’s fairly uneventful news. Their production facility’s annual capacity is the same … about $40 million per year. This one doesn’t change that.
Comment by Lewis — 12/8/2008 @ 8:02 am
Assuming we are going up from here based soley on fundamentals, what do you see technically? Additionally, do you have any idea how many total shareholders there are in CGYV.OB? Thank you.
Editor’s response: I think $3.00 is a good technical target for CGYV. There’s really not a lot of history for this chart to come up with a technical target, but based on what we’ve got, $3.00 would be a stretch-but-possible goal.
I think - if I recall correctly - there are about 3000 shareholders. That includes a lot of tiny positions though. Don’t quote me on the figure; I’ll find out the specifics for sure and get back to you through the blog.
Comment by Lewis — 12/3/2008 @ 11:40 am
Do you see the margin improvement (huge, positive improvement) evident in the lastest 10Q continuing? What is your feel for the profit margin (gross and net) going forward? Thanks.
Editor’s response: Yes, I do see better margins ahead for China Energy. I don’t think they’ll be like the huge margins we saw in Q1, but I think they’ll trend better than Q3’s margins.
Bear in mind they took some non-cash (one time) charges in Q2 that lingered into Q3, which hurt the bottom line. Those will fade away though, and I think sooner than later. So, I do expect to see measurable improvement in profitability here. I don’t know that I would use the word ‘huge’, but I think the term ‘very respectable’ would be fine. My guess is that margins will be sustained somewhere in the 10% to 20% range.
Comment by Lewis — 11/25/2008 @ 9:44 am
What would you consider fair value for this company since those strong earnings?
Editor’s response: Great question. You could make several assumptions. For instance, applying rules-of-thumb in regards to P/S, P/E, or growth ratios.
Since they’re profitable, the P/S as well as the P/E mean something….the P/S in particular. With $6 million coming in per quarter, or $24 million per year, you could make the case that a reasonable P/S of 3.0 means the company should have a market cap of $75 million or so.
Last quarter’s earnings aren’t a fair representation of future earnings; I think quarterly earnings of $500K to $1 million are going to be the norm when revenues are at $6 million. With revenues at $9 million, earnings will be closer to $1 million per quarter. At that point - and assuming an acceptable P/E is 12 - then the company should be valued at $48 million.
However, neither of those tools really captures what’s attractive about this company… which is growth. The P/S and P/E rules of thumb assume the status quo is permanent; China Energy is on the move. Based on their growth rate and potential, I think a short-term (1 year) valuation of the company should be something around $100 million. Longer-term - once more capacity is added - I think $300 million isn’t out of the question.
That’s the thing about a moving target… hard to pin down.
Comment by Anonymous — 11/20/2008 @ 8:22 am