Week of 07/11/07 Stock Picks

This is my first post on this blog and I would like to start off by writing a little mission statement. I have created this blog, not for profit, but for the well-being of those reading this blog. Many of these paid-for stock pick newsletters will give buy ratings on stocks that have already been on the up and up, minimizing profit. This blog will serve both as a stock pick and analysis asylum as well as a discussion forum, where readers can post their opinions on any of my picks.

Anyway, to kick off my first day of business, I am going to list 5 stocks of mine. I normally wouldn't list this many stocks, but today is a special day.

*Divx: symbol DIVX- This is a video compression/decompression software company that has a very low P/E as well as PEG(price to earnings to future growth), as well a lot of cash and very little debt/expenses. They are also a brand that I see rapidly being integrated into all of the dvd and other media players. In addition to having solid fundamentals, I see this San Diego based company as a prime takeover target by either industry giants Google or Microsoft. Both companies use Divx's services and are looking to expand to all facets of the internet/computer services industry.

Korea Electric and Power: symbol KEP- This is the sole provider of energy in korea. It is mostly owned by the government of korea and is in fact a monopoly. Luckily, Korea doesn't have anti-trust rules that would prevent such a thing from happening. KEP is a solid company that you will not be taking on much risk with if you decide to invest. They are extremely cheap at the price of $23 and I can see it doubling in a year or two. Their P/E is one of the lowest in their innustry. In addition to having solid revenues from the ever-growing consumption of energy in Korea, Kepco is getting more contracts to develop energy plants in the underdeveloped parts of china.

Syntax-Brillian: symbol BRLC- Syntax-Brillian is the maker of the Olevia brand LCD tvs, which are becoming more and more popular. Olevia is a slightly lower grade tv, but much cheaper than industry leaders Sony and Panasonic. This is a fundamentally sound company with little downside. It is at the cheap price of $6 after concerns that Circuit City would not renew their contracts. This in my opinion is a huge market overreaction. Even if circuit city were to not carry the brand anymore, there is enough demand for the company's products that it would still have a good amount of business. For example, the company just got a contract to be the on-site provider to the X-Games. There is also great speculation that BRLC will be providing tvs to the Chinese citizens so they can watch the 2008 Beijing games in High def.

American Oriental Bioengineering: symbol AOB- AOB was recently under a lot of criticism from a Barron's news article that made faulty accusations about this Chinese over the counter company's business practices. These were all accusations which lacked any bit of truth behind them. I suspect that this article was written by someone who was receiving money from the hedge funds. After this article was published, the stock went down a lot. A day later, all of the analysts started giving it buy ratings. Coincidence? A day after the article was published, Shaumo Sadhukhan, an analyst at lotus partners published a letter to the editor refuting everything the article said about AOB. This is a solid company that I can easily see doubling within the next year.


======================
Part One

An Exchange on a China Stock
To the Editor:

On June 25, Barron's published a negative column by Leslie P. Norton entitled "Chinese Medicine Show" about American Oriental Bioengineering (ticker: AOB). My firm is a shareholder of AOB. I have traveled to Harbin and Hezhou in China to visit AOB's offices, factories, managers, and distributors. The picture that has emerged is diametrically opposed to the portrayal in the column. I have found the company has quality products, fast growth, known brands, savvy management, and hardworking employees.

I believe that the issues raised by the article are immaterial to the fundamentals of the company. However, I would like to address them:

• Peptide products inhibit tumor growth.


AOB has never claimed inhibition of human tumors. A press release in 2004 stated that AOB researchers had shown inhibition of tumor cell growth in mice. Studies done by American researchers (including at UC, Davis) have shown similar results.

• AOB recently said that China will be its main market, whereas earlier filings mentioned international opportunities.

There is no inconsistency between AOB's past and current statements. In 2003 and 2004, AOB had two major products. A significant percentage of sales came from Korea and Japan, and expanding those products into foreign markets was a major objective. AOB has since acquired or introduced new products with sales in China that are much larger than the sales of legacy products. As a result, the company's current statement that China is its main market is not contradictory to past statements.

• Director Wang Xianmin aided the IPO of Daqing Lianyi, whose executives bribed officials.

Wang was a government official in Heilongjiang Province and not an employee of Daqing Lianyi. There is no evidence of anything improper by him. A background check on Wang run by AOB revealed nothing. This is a classic case of guilt by association based on speculation.

• Packaging for soy peptide claims use of technology from UC, Berkeley.


The company does not use technology from UC, Berkeley. AOB had been in past negotiations with UC, Berkeley, to license patents. During this negotiation, one of AOB's local marketing agents inadvertently put this claim on its packaging for the Hong Kong market only (less than 1% of sales). The company is correcting this problem.

Continue

• AOB was involved with CEOCast and MidContinental Securities. Controlling owners of these firms have questionable histories.


The fact that Michael Wachs controlled CEOCast was only discovered a year after AOB stopped doing business with the firm. AOB no longer has any relationship with either CEOCast or MidContinental and was not aware of either company's history at the time of involvement. There is no allegation of any wrongdoing occurring from AOB's involvement with either firm.

More important than whom AOB was peripherally involved with in the past is the people it is directly involved with today. AOB Board Member Lawrence Wizel was a partner with Deloitte and Touche for 26 years. Director Cosimo Patti was an arbiter for the NASD and NYSE for 18 years. It is unlikely that these people would serve as Directors if integrity or accounting problems existed.

AOB is a fast-growing company at an extremely cheap valuation with a phenomenal track record of creating shareholder value. Excluding cash, AOB trades at 9x forward (2008) earnings. EPS has grown at a 43% CAGR over the last four years, and consensus projections are for 37% growth in the next 2 years.

Most importantly, AOB possesses a unique opportunity to acquire at extremely attractive prices. This opportunity is illustrated by recent history. In 2004, AOB acquired HSPL for $7MM. Today that company generates an estimated $6MM in net income. AOB paid a little over 1x current earnings. In April 2006, AOB paid 2-3x year-end 2007 run rate earnings for GLP.

The case for AOB is simple. How many other NYSE companies trade at 9x earnings, are growing 30%+, and have the opportunity to acquire at 2-5x earnings?

My work in China has confirmed this story. I've seen AOB products on the shelves, toured their factories, and confirmed that its brands are known and demand for the products is real.

Sincerely,
Shaumo Sadhukhan
Managing Partner,
Lotus Partners
New York City
======================

*Reliance Steel: symbol RS- Reliance Steel & Aluminum Co. operates metals service centers in the United States and internationally. It provides metals processing services and distributes a line of approximately 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, titanium, stainless steel, and specialty steel products to fabricators, manufacturers, and other end users. This company, like my other recommendations, has solid fundamentals and has great growth prospects. This is a great play for the steel industry, as this company has a great deal of upside. They get many metals contracts and are still relatively small in the industry, so get in while their market cap is still low.

Those are my picks of the week. Check back on monday for my pick(s) of next week. On every first of the month, I will post my returns on each of these picks at the price I recommended them at. In addition to reading this, I encourage you all to do your own research to supplement the research I have already done. Feel free to leave a comment or two and I will see you next monday.

-Jeff