Seansonfire (29.20)

2011 Small Caps with 50% Upside

January 04, 2011 – Comments (3) | RELATED TICKERS: SOL , KOOL , ZOOM

As I did last year I made a couple of predictions for the year on what Mid/Small Caps would have a spectacular 2010.  If you read my other post here, I summarized how I did on my 2010 picks, which was about +22% on average.  I missed my goal of an average of 50% return for the year in 2010, but I intend to turn the tides and produce 50%+ returns on average for my 2011 picks.

For 2011 I will focus more on small caps or microcaps depending on how you define the two.  I will try to restrict myself to a few really good ideas.

SOL - ReneSola Ltd. -  A Chinese manufacturer of Solar Wafers as well as Solar Modules.  That statement alone scares away investors who are both afraid to invest in the Solar industry, due to the fact it is largely driven by government support, and China, for several reasons which I won't go into (just google it).  For those and the fact the entire solar demand from Europe has been put in question due to Germany contemplating a restructuring of their fee in tariffs for 2011, the stock is down roughly 42% from its highs around $14/share earlier this year.  So that’s the bad news, now the good news. 

SOL has two integrated businesses Solar Wafers and Solar Modules, the second of which just came online in 2010.  As the Solar business goes integrating vertically has almost become a necessity in order to produce and sustain high margins (currently around 16.4% profit margin).  SOL has just completed this integration and now has a cost structure that allows for a sustainable profit margin.  Not all of SOL Solar Wafers are used in its own production of modules, which means it is also a supplier to it’s own competitors in some cases. This is actually beneficial to SOL as it gives it some flexibility and the ability to retain a lower and more consistent cost structure then its module competitors.

With capacity growth of wafers and modules production at roughly 50% and 70% y-o-y respectively and overall pricing concerns for the industry it will be hard for SOL to retain it’s certain margins of 32% gross and 16% profit.  Assuming worst case a 50% reduction in margins and 50% capacity actually sold in 2011, I arrive at earnings ranging from 1.55 – 1.65 which is about a forward P/E of 5.5.

My take is there will be pricing pressure and reduction in capacity in the Solar industry in 2011 but SOL is positioned well with a lower cost structure then other Chinese competitors.  By the fall as we look forward to 2012 SOL will be back to its high of $14/share.

KOOL – Thermogenesis – A Stem cell supply company that provides the needed support for the Stem Cell industry to complete Clinical Trials.  Stem Cells haven’t fallen out of the limelight ever since the largely public debate that went on around the end of President Bushes first term.  Since then several companies have been working to bring the promise of Stem Cells to reality.  To date there has been very little success in this field, as Medical Research takes time and money.   Lucky for KOOL money (as a need for new blockbuster drugs in the next 5 years) is what many of the large Pharmaceutical Companies have right now.  And they want to invest it in Stem Cells, as seen here from Genyzme. 

This coupled with strong revenues growth and improving margins will make KOOL profitable in 2011 (which is always the right time you want to own a micro cap company, as it is proof of concept/market).  I see earning in 2011 at 0.15-0.20 a share with revenue growth around 20%. 

ZOOM – Zoom Technologies – Chinese Cell Phone Manufacturer that provides both Electronic Manufacturing Services of OEM (original equipment manufacturers) as well as produces its own cellular phones under its brand Leimone in China.  Zoom is resource for other cellular phone manufacturers that are looking to build phones within China for Chinese use, in the case that they don’t have the technical or manufacturing capabilities.  Zoom has grown it’s revenues significantly over the past 2 years, with serious growth coming in 2009 as it began contracting out its services to Samsung, China Mobile, and several Chinese Cell phone manufacturers. 

Zoom will benefit largely from the growth of the Cellular industry as a whole in China, especially during the coming uncertain climate, as many companies may not be willing to invest capital into a new phone manufacturing facility and thus require ZOOMs services.  If it can successfully develop its internal line of Cellular phones Leimone that is just upside for the company.

Zoom is currently trading at a forward P/E of 5.01, as 2011 earnings projected were reduced back in the summer for 2011.  I think that the market climate has changed significantly in China since the previous summer and you will see a revision of 2011 forecasts upwards to 1.25 range, which will in turn drive the stock price upwards.

Well those are my three Small Cap Picks for 2011, enjoy!