Shooting Fish in a Barrel

07/27/2010 12:16 pm EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

The leader of China’s booming aquaculture industry ought to be reeled in as a steal, writes J. Royden Ward of Cabot Wealth Advisory.

One of Benjamin Graham’s earliest analyses, created and tested 75 years ago, is the Net Current Asset Value (NCAV) approach. The objective of the NCAV formula is to find the minimum value a company would fetch if it was liquidated. The formula is:

Net Current Asset Value (NCAV) = cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities – preferred stock

The resulting value can then be divided by the number of common shares outstanding to find the NCAV per share. If the current stock price is less than the NCAV per share, the stock is a bargain.

However, not many companies are selling below their Net Current Asset Values. I screened 9,000 companies and found only 12 selling below their NCAV. And most of the companies are not very prosperous.

One stock stands out, because the company is in an industry with great potential.

HQ Sustainable Maritime Industries (Amex: HQS) is a leader in the aquaculture industry in China. Aquaculture includes the farming of fish and aquatic plants in fresh-water or ocean enclosures. The aquaculture industry supplies one half of the world’s fish and shellfish needs. Aquaculture is the fastest growing segment in the food production system and has been for the past two decades.

HQ Sustainable Maritime is an integrated aquaculture and aquatic product processing company with operations based in the island province of Hainan, in China’s South Sea. The company’s aquaculture is conducted in fresh- and salt-water areas that are pristine and free from pollutants such as mercury and plastic trash. In addition to raising and harvesting fish, HQ processes and sells fish and fish products including tilapia, shrimp, squid, and red snapper.

HQ Sustainable Maritime is China’s largest exporter of tilapia and commands 10% of the tilapia market in the US. Tilapia is a popular name for numerous freshwater fish originally native to Africa. Tilapia is easy to farm, mild in taste and rich in protein.

The company produces and sells Lillian’s Healthy Gourmet Meals and other fish products in the US. The company has cold-storage facilities and aquatic product-processing facilities in Hainan. In addition to headquarters in Seattle, the company has operational offices in Wenchang, Hainan.

HQS’s sales have grown steadily from $27.5 million to $72.3 million in 2009. Earnings per share (EPS) were $0.54 in 2007, $0.78 in 2008, and $0.60 in 2009. EPS are expected to advance to $0.85 in 2010 and then $1.00 in 2011.

At the current price of about $4.50, HQS shares sell at a discount to their NCAV of $5.13 and book value of $7.75. [Shares closed at $4.45 in New York Monday—Editor.] The current price-to-earnings-ratio of 7.5x is cheap, although the company does not pay a dividend. HQS shares trade 133,000 shares daily from a market capitalization of $66 million.

I recommend buying HQS at or below $5.13. Sell when the price reaches $7.70.

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