Exactly one year ago, a tiny penny stock was hovering around the dollar level. Actually, it was trading for $1.08 per share. Less than a year later, the stock jumped in value to over $2.00… then $4.00… then $8.00… finally peaking at a value of $10.24 a share!
For those of you quick on the math, that’s a massive 848% win – in less than 8 months!
Why was this one penny stock so successful?
I have two words for you – RARE EARTH.
Now the company is trading for more realistic values because of the turbulent market action.
Recent Price $2.63
Market Cap $81 m
Shares Outstanding 30.8 m
Average Volume 186,054
Dividend Yield N/A
China Shen Zhou makes the majority of its money from Fluorite.
Now, I know what you’re thinking… google the term “Rare earth” and you won’t see Fluorite listed! Here’s the thing… Fluorite may not be an official “Rare Earth”… but it’s rare enough for the Chinese Government to restrict the exploitation of it.
Why all the fuss?
Fluorite is used primarily as a melting agent. To put it simply Fluorite lowers the melting point for steel and also aluminum. It also makes removing imperfections in the steel easier.
We’ve done a series of reports on Chinese companies. The obvious motivation is China’s epic growth rate. With annual growth around 10% China has a ravenous appetite for steel.
And right now, almost 88% of the Fluorite produced in China is used domestically.
What’s more, there is also a good reason to assume prices will continue to rise. In early 2010 Fluorite was $118/ton, a few months later prices hit $295/ton. If China continues to restrict exploration and exploitation of Fluorite, prices should continue heading higher.
Business prospects are definitely looking up for SHZ. Their revenue jumped 318% in Q2 2011 compared to the previous year. Gross margin more than doubled too.
Revenue was $9.1 million, with the company posting a net income of $128,000. That’s a great sign for the future of this company. Their assets are up nearly 60% year over year. Liabilities are actually trending down.
Earlier this year management had a lofty goal of tripling revenue. They’ve already hit $11 million this year after only two quarters. That’s an increase of 284% year over year. Can they hit their target?
China Shen Zhou is certainly well on its way to getting there.
KEY METRICS ANALYSIS
Trailing P/E N/A
Price / Sales 6.8x
Return on Assets N/A
Insider ownership 79.3%
Short Ratio 4 x
Current Ratio 0.74x
Total Debt To Equity 31.7
Early this year China Shen Zhou bought 55% of another Fluorite mining operation. In that deal they acquired rights to three additional mines.
Remember, mining operations take time to set up. We haven’t seen full revenue potential from those mines yet. However, down the line they should provide a healthy increase in both production and revenue.
So business is strong, and prices are rising. New mine sites are being acquired, and goals for increased production are set.
Combine all that with a government policy heavily in their favor, and you have what sounds like a winning combination!
Xiao-Jing Yu – Chairwoman and CEO
Helin Cui – COO and Director
Xueming Xu – Director
Ligang Wang – Vice President
Chart Courtesy of StockCharts.com
SHZ’s improving financials isn’t reflected in their stock’s performance. But that’s good for investors. A lot of great value companies, especially in China, are becoming very affordable. The recent market woes are great buying opportunities.
This company has already grown revenue by an extraordinary amount this year. This stock was trading for nearly $11 in January after posting a loss in 2010. There’s nothing stopping this company from getting back up there now that SHZ is in the positive.
SHZ’s 52-week low was $.82 and the 52-week high was $10.84. Right now the stock is trading at $2.63. The 50-day moving average is near $2.96 a share and the 200-day moving average is at $4.26. The company has a market cap of $81 million and 30.8 million shares outstanding.