How Do You Say Vitamins in Chinese?

03/11/2009 12:00 am EST

Focus: GLOBAL

Timothy Lutts

Publisher, Cabot Heritage Corporation

Timothy Lutts, publisher of Cabot Wealth Advisory and Paul Goodwin of Cabot China & Emerging Markets Report, likes a small Chinese purveyor of nutritional supplements.

Investing in low-priced stocks is tempting but tricky. Our advice: Take small positions, cut all losses short, and take profits on the way up.

Money goes where it’s treated best, or at least where investors perceive it will be treated best. Today, a lot of money is on the sidelines somewhere, because fear is high—in money market accounts, three-month Treasury bills yielding [almost nothing] and in 30-year government bonds. It's better than losing money, but the returns will look pretty meager after the next bull market begins.

A lot of money has also “disappeared,” as prices of both stocks and (mainly corporate) bonds fell in the past year. As prices recover, that money will “reappear,” but in different places, where investors perceive it will be treated best. 

So, taking off from the concept that the next big winners will be companies that were previously unknown and unloved, here’s an investment idea.

It’s China Sky One Medical (NASDAQ: CSKI), a developer of over-the-counter nutritional supplements and traditional Chinese remedies and medicines. In 2005, revenues were $7.7 million, in 2006 they hit $20 million, and in 2008 they swelled to $49 million! In the most recent quarter, revenues grew 77% to $29.7 million, while earnings grew 36% to 60 cents per share.

China Sky One Medical has grown its sales 158% and 148% in the last two years with a huge product line that includes items like weight-loss patches, wart removers, hemorrhoid ointments, and dandruff shampoos. A quarter of the company’s sales come from outside China, which is a good connection for any Chinese retailer.
 
CSKI has been public just since last May, and it has been through a decline from its post-IPO high of $17 to an October low of $6, before recovering strongly on good volume. (It closed Monday above $10—Editor.)

The stock’s average trading volume is just 53,000 shares a day, which is way too low to ensure liquidity. But with a [price/earnings ratio of 8x] and strong sales and earnings numbers (including an after-tax profit margin of 33.5%), along with a strong chart, it’s one to keep an eye on. 

Trading volume has grown [recently] and now averages 115,000 shares a day—still light, but moving in the right direction. And the stock’s action is encouraging.

The chart for CSKI shows a stock that is trading sideways in a tight range. This is exactly the kind of launching pad we like to see, as a tightening chart on declining volume often precedes a big move. Continue to watch CSKI.

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