A Tiny Company Powering the Tech World

Just take a quick look at the calendar. The holidays are right around the corner. And that’s a great time for investors… I’ll show you why in a moment.

The holiday season is a very exciting one for consumers and retailers. New products hit the market, discount sales are everywhere, and consumers are confident in their spending. The market is always quick to pick the holiday winners and losers of the year.

This fourth quarter is shaping up to be more exciting than most.

Lots of big questions have yet to be answered. Which pad or tablet will make the biggest splash with consumers? Can Amazon’s Fire pull sales out of Apple’s pocket? Will Google’s Android operating system make further inroads into the smartphone market?

Clearly hundreds of millions of dollars hang in the balance. Successful products will propel some stocks to new heights… those unsuccessful products will push their corporate stock prices ever lower.

Companies like Apple, Intel, HP, Dell, Nokia, Cisco, and IBM are going to be selling the gadgets. But which company do you pick? How do you limit risk?

Wouldn’t it be great if you could get in on Apple’s profits without having to drop $400 for a share of APPL?

Wouldn’t it be great to sidestep the risk of an investment in HP or Dell?

I’ve uncovered a back door way to invest in the success of all of these companies… so regardless of whose product is the hottest, you have the opportunity for a win!

No, I’m not talking about some gift-wrapped holiday mutual fund. I’m talking about component manufacturers in the semiconductor industry.

The company I discovered caters to many of the tech titans. Not only does it count the world’s leading technology manufacturers in its client list, but it’s also a great small cap value stock. Allow me to introduce…

 

KEMET CORP 
KEMET (KEM) develops and manufactures capacitors. Capacitors are a key component of almost all electric gadgets. KEM operates 23 production facilities with over 11,000 employees. They manufacture in the U.S., China, Europe, Mexico and Indonesia.

Almost every consumer and industrial electronic piece of equipment you can name has capacitors.

Smartphones, laptops, netbooks and tablets are filled with them. Before we go any further on KEMET’s business let’s get some capacitor basics out of the way.

 

WHAT’S A CAPACITOR?
Capacitors are passive components in a circuit. They don’t create energy like a battery does. It’s a storing device. And it’s designed to deliver energy on demand.

The simplest capacitor analogy is a water tank. For example a pump filling up the tank with water acts like a power source. The tank itself is the capacitor. As you can imagine, tanks can hold different amounts of water, and Capacitors can hold different amounts of energy.

Every tank has a release valve, and a capacitor is no different. A switch in the capacitor determines how much energy is released.

Depending on your little gadget’s needs, a little or a lot of energy can be supplied.

Capacitors come in all different shapes and sizes. Some fill up fast, others fill up slow. Some have huge storage capacities others… not so much.

Here’s the key to capacitors.

Power consumption is a huge component of modern electronics and without capacitors our technology and gadgets wouldn’t function the same way.

 

KEMET’s CAPACITORS
As we discussed, capacitors come in many shapes, sizes, and configurations. In fact KEMET manufactures 250,000 unique capacitor configurations. So they’re able to meet the needs of almost anyone out there.

The company breaks down their production into three material groups: Tantalum, Ceramics, and Film and Electrolytic.

Kemet is set up so these three groups each have their own respective facilities and research and development efforts.

In the quarter ended June the company did $290 million in sales. Tantalum accounted for 42.2%, Ceramic for 20.5%, and Film and Electrolytic was 37.3% of revenue.

KEMET has the most comprehensive selection of capacitors found anywhere. And that’s what made them the supplier of choice for a lot of big tech clients.

Another differentiating factor between KEMET and its competitors is distribution and capacity. In a world where Apple can increase iPhone production by 6 million units in a quarter you need component manufacturers with lightning fast speed-to-market capabilities.

And if you’re looking for a textbook example of diversification look no further than KEMET.

Their capacitors are used in computing, industrials, telecommunications, transportation, defense and healthcare. No single segment accounts for more than 30% of their revenue. And only one of their customers, a distributor, accounted for more than 10% of their net sales in 2011.

Now let’s take a closer look at their financial numbers…

 

KEMET’s FINANCIALS
KEM’s fiscal year ends on March 31. Their most recent annual numbers were released on May 20 2011. Revenue for the year was up 38.3% and gross profit was up a whopping 113%.

Net income reached $63 million for the year… which is a staggering turnaround from the loss they reported in 2010. The following two quarters of 2011 were strong but a non-recurring expense cut into the company’s bottom line in their Q3.

As of December 31 the company has $136 million in cash and another $106.5 million in accounts receivable. They also have $229.8 million in long term debt. All in all, it’s a strong balance sheet.

 

KEMET’s CURRENT PROJECTS
Management has been pursuing an aggressive strategy of vertical integration.

In June 2011 KEMET completed its acquisition of Tennessee based Cornell Dubilier Foil.

Their state of the art foil etching facility is one of the largest in North America. They scooped it up for only $11.6 million.
KEM is also getting into the mining business. They’re opening a mine in Congo.

The region is rich with Tin, Tantalum and Tungsten, all of which can be used by Kemet in their products.

Remember, KEM’s largest business segment is Tantalum. The first Tantalum was scheduled to arrive at the smelters in September 2011.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Billions to Be Made In Heating Oil

There are few certainties in life. Like death and taxes. As a result, there’s always going to be a demand for morticians and CPAs. Funny thing is there aren’t many of them… so, when you uncover a business that profits from life’s certainties you want to jump all over it.

That’s why we’re kicking off the New Year with a business focused on another of life’s certainties – the weather.

While day to day and hour to hour you might never know if you’re getting rain, shine or fog… but longer term we’re all familiar with the seasons.

We know winter is cold and it’s followed by spring, summer fall… then winter again!

With winter we get cold weather, rain, snow, sleet, and ice. And you know what that means? People are trying to keep warm!

And lucky for us there’s an entire industry focused on providing heating oil to homes and small businesses. Consider this…

As of 2009 there were roughly 113.6 million homes in the United States. And according to the most recent Energy Department survey 12.5 million are heated by oil and propane.

Now many of these homes are found in the northeast, and they’re often in rural areas, where natural gas isn’t available.

Amazingly, 83% of U.S. households that use heating oil are in these regions.

So it’s no surprise the demand for heating oil has a big cycle. People use a lot of the stuff in the winter… and not so much in the summer!

But if you live in a home heated by heating oil, there’s a certainty in your life… you must buy heating oil… and a lot of it.

So who profits from this constant demand? Companies like…

 

STAR GAS PARTNERS (SGU)
Star Gas Partners supplies heating oil and propane to 407,000 customers. They operate in the North East and Mid-Atlantic regions of the U.S. With a customer base like that, it’s no surprise that Star Gas is the largest retail distributor of heating oil in the country.

The company also provides installation and maintenance services for heating and air conditioning units.

Star Gas has expanded their business to include additional home maintenance services. They now provide security, plumbing, and some electric utility products.

The company also sells and delivers gasoline and diesel to some customers.

Approximately 79% of SGU’s revenue comes from the sale of heating oil and propane. Another 13% is derived from their installation, repair and home services business. The remaining 8% is from sale of other petroleum products.

The company utilizes approximately 30 different brand names in the various regions they cover. Many were small businesses they acquired.

Now consider these exciting facts…

Of the vast majority of SGU’s heating oil customers, 97% are residential. On average they received 340 gallons per delivery. And in a typical year the company makes four to six deliveries per customer.

Winter is a big factor in Star Gas’ stable revenue stream. Approximately 97% of those full service customers are on auto-schedule contracts. As long as winter comes and goes, heating oil sales will continue… automatically.

 

THE COMPANY’S BUSINESS STRATEGY
Star Gas’ basic strategy is the same as most companies. Increase operating profits and cash flow with conservative management of operating resources. And growing and retaining their customer base.

In an industry like heating oil that’s not always a simple feat. In each of the last three fiscal years they have lost 1.2% to 1.6% of their customers. Not to other heating oil distributors, but to natural gas.

That doesn’t mean the company can’t grow its customer base. They just grow it through acquisition instead of advertising!

For example in October SGU purchased John Ray and Sons. The Albany based oil, propane and diesel distributor serves 10,000 customers in their area.

In August the company acquired Southern Propane Services based in South Carolina. This company has the added bonus of expanding SGU’s geographic footprint considerably.

They also acquired a heating oil company servicing 1,900 customers in Long Island’s Suffolk County. With estimated additional demand of two million gallons a year.

The beauty of this is most of these customers are sticky… in other words once they start ordering heating oil from a company, they’re not likely to stop.

It also gives the company a nice diversified base of customers to sell other services… like maintenance and repair, air conditioning, plumbing, and even home security services.

 

STAR GAS’ FINANCIALS
Star Gas’ fiscal year ends on September 31, and their annual numbers were released on December 7, 2011.

The company recorded sales of $1.6 billion. That’s up over 30% from $1.2 billion in 2010. Not bad for a little company!

Revenue from SGU’s installation and service segment was up 7% to $198.4 million.

In 2011 SGU sold 355.6 million gallons of heating oil. Their overall volume of sales by gallons increased 14.6% year-over-year.

They bought the heating oil at an average price of $2.63 a gallon wholesale. They then sold it to customers at an average price of $3.54 a gallon.

Obviously, there’s a close correlation between the company’s margins and the wholesale price of heating oil.

Star Gas had a nice margin of $0.912 a gallon… A slight decrease from last year’s margins of $0.916 a gallon.

Now net income is down a bit from $28.3 million in 2010 to $24.3 million in 2011. Still, not a bad profit for the company and its shareholders.

Looking at the balance sheet, the company’s on solid footing. They have net assets of $626.1 million, including $86.7 million of cash!

 

ANALYSIS OF SGU’S STOCK

 

 

 

 

Chart courtesy of stockcharts.com

 

It doesn’t take a rocket scientist to see Star Gas’ stock is set up for a nice run.

As you can see after climbing in the early part of 2011, the stock has slid a bit giving us a great entry point.

Remember, SGU works with one of life’s certainties… winter. Come hell or high water, people need heating oil, and SGU stands ready to meet that need… and make a nice profit too.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Hot Penny Stocks – Kingold Jewelry (KGJI)

The ADP Employment Report for the month of January 2012 was released on Tuesday morning. Their current estimate is 175,000 jobs created in the month of January. That’s slightly lower than the consensus forecast of 185,000.

Despite the bad news the market continues to hold strong.

Earnings season continues this week with Amazon (AMZN), Exxon Mobile (XOM), and The New York Times (NYT) all reporting. 

 

QUICK FACTS
Ticker                                        KGJI
Industry                                     Gold
Recent Price                             $1.57
Market Cap                               $77.3 m
Shares Outstanding                  50.2 m
Average Volume                       113,300
Dividend Yield                           N/A
Website                                     http://www.kingoldjewelry.com

 

COMPANY DESCRIPTION

Kingold Jewelry (KGJI) is a Chinese company in the business of designing, producing and selling 24-karat gold jewelry and other products.

Kingold sells their finished products wholesale and retail. Those include jewelry, Chinese ornaments, and gold bars. Some of their designs are made in-house. Others are customized products made for retail chains.

In 2001 the Bank of China liberalized their gold policy. They loosened their grip on gold imports and ownership which created massive new demand. Kingold was founded the following year to capitalize on the surging demand.

Jewelry holds an important place in Chinese society today. One of the first things to go after the Chinese Revolution was personal wealth, such as jewelry. Now that gold ownership has been liberalized, jewelry has become a symbol of the expanding middle class.

 

FINANCIALS

KGJI’s most recent quarterly numbers were released on November 9, 2011. 

The company reported revenue of $210.7 million in the quarter. Up from last year’s third quarter revenue of $169.7 million. This is an increase of 24.2%.  Kingold also reported a net income of $9.7 million… an increase year-over-year from a net income of $4.8 million.

As of September 30, 2011, the company reported $3.2 million in cash and $400,000 in long term debt.

 

KEY METRICS ANALYSIS

Trailing P/E                               2.8 x
Price / Sales                             0.1 x
Return on Assets                      24.4 %
Insider ownership                     43.6 %
Short Ratio                               1.7 x
Current Ratio                            23.6 x
Total Debt To Equity                  0.3 x

 

RECENT EVENTS

On January 16, 2012 Kingold announced the opening of their first company owned direct retail store. The company’s new retail facility is located in Wuhan, one of the country’s largest cities.

The company chose to open the store in the ritzy Wuhan World Trade Plaza Mall. The 80,000 square meter shopping mall is the largest in the Hubei province. The company estimates that 60% of the city’s jewelry sales take place in this shopping plaza. 

The store was opened just ahead of the Chinese New Year holiday on January 23.

This is Kingold’s second step towards reaching out directly to consumers. In 2011 the company launched an e-commerce website, http://m-gold.com.cn.

 

MANAGEMENT TEAM

Zhihong Jia – CEO
Bin Liu – CFO
Bin Zhao – General Manager, Director
H. David Sherman – Independent Director

 

STOCK ANALYSIS

 

 

 

 

 

Chart courtesy of stockcharts.com

 

KGJI’s 52-week low was $0.88 and the 52-week high was $3.15.  Right now the stock is trading at $1.57.  The 50-day moving average is near $1.42 a share and the 200-day moving average is at $1.43.  The company has a market cap of $77.3 million and 50.2 million shares outstanding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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