Two Deep Bargain Stocks: YONG, TEU

Gary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Incredible bargains can be found in the oddest places, sometimes even in your own portfolio.

Here are two profitable stocks from my portfolio that are currently priced at deep, deep discounts.

The first is quickly growing by helping plants grow in the fertile fields of China.  The other, in just over a year, created a bustling sailing fleet already shipping shareholders a remarkable 17% dividend.

YONG – Raising earnings and sweet melons

With more than 1.3 billion mouths to feed, China is making serious improvements in agricultural production to meet demand (and help farmers produce more food per hectare). That sparked my interest in fertilizer manufacturers Yongye  (NASDAQ: YONG) and China Green Agriculture (NYSE: CGA).

Pardon the comparison, but this isn't their grandfather's B.S. Today's fertilizers are high tech.

Yongye manufactures and sells Shengmingsu, a fulvic acid based fertilizer that boosts yields of crops, vegetables and fruits by 10 to 35 percent.

Sales have been growing faster than sweet melons treated with Shengmingsu. Year over year sales increased 14.8% in the second quarter.

However, share prices have dropped from $12/share in 2009 to under $3 this summer. The P/E ratio is now only 2.5 (based on trailing earnings). How could P/E be that low for a growth company?

YONG data by YCharts

First, Yongye was caught in the downdraft.

A few years ago Americans were excited by anything Chinese. With few U.S. traded Chinese companies, share supply far outpaced demand. With investors begging to throw more money at China, scoundrels took several sleepy Chinese companies public in pump and dump moves. I personally fell victim to American Oriental Bioengineering (I hadn't yet read Peter Lynch's advise to beware of companies with trendy names). After being pumped and dumped, AOB's price rapidly declined and the company is now delisted.

The downdraft of these “failing” companies has sucked down the other Chinese Small-Caps, including Yongye, painting their credibility with the same dirty brush.

Second, the shorts pushed prices down

There's money to be made even on the way down by shorting shares – selling shares one doesn't own to profit from price drops. Shorts took advantage of the downdraft. By mid-March over 4.7 million shares of YONG were sold short – more than all the YONG shares traded in all of February.

A wave of negative posts and blog entries drove down the prices of YONG and other heavily shorted Chinese small-caps. In the short-run, small cap stock prices are very vulnerable to large price swings based on rumors, innuendo and the occasional lie.

Yet, it all works out. Benjamin Graham said “in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine.” Yongye's stock price is poised to rise upward toward it's true value.

YONG bottomed out in May at $2.60/share before rising over 50% this summer. It's time to pick up shares of YONG on the way up.

TEU – Sailing into a 17% dividend yield

There are two ways to make money from stocks: price appreciation and dividends.

Container ship owner Box Ships (NYSE: TEU) has a dividend yield near 17%. Even if the share price never moves a penny again, TEU provides market beating returns because of that 17% dividend.

How can Box Ships afford a dividend during the global recession? One would think with less stuff to ship, there's less need for ships.

You're right. Ships are now plentiful and cheap. What's hard to find is a profitable shipping contract. That's a period time charter contract where the entire ship is chartered for months or years at a set rate. Ships that come with period time charter contracts have a constant income stream.

Shipping companies can spin off these profitable assets (worst case scenario, to insure the ship can't go down with the company). Dry bulk shipper Diana Shipping (NYSE: DSX) spun off its container ship subsidiary Diana Containerships in 2010.

In April 2011 Paragon Shipping (NASDAQ: PRGN) spun off Box Ships. Paragon ”sold” its container ships with existing shipping contracts to Box Ships in exchange for stock. Additional shares of TEU stock were sold to purchase more container ships with existing period time charter contracts.

TEU's dividend policy is to distribute substantially all of the operating cash flow less expenses. So cash flow will predictably continue from the period time charter contracts already in place.

Are TEU dividend yields too high?

When investing in dividend stocks, your percentage yield (dividend/price) increases when you buy at a lower stock price. Since the dividend rate is fine, we must ask why is the current stock price so low?

Instead of being priced on its own merits, Box Ships is being judged the same as the entire shipping industry.  This has created a window of opportunity for savvy investors.

The shipping industry as a whole has not done well during the global recession. For example, I unfortunately owned shares of General Maritime, a crude-oil tanker owner, figuring the share price would recover when shipping rates recovered. Shipping rates didn't recover in time. GMR steadily sunk into bankruptcy.

And what's relevant to today's discussion, GMR issued additional stock shares on the way down. When times are tough a company needs money to pay the bills. Issuing more shares provides cash to pay bills, but this dilutes share value for the current shareholders.

So investors who weren't paying close attention were very surprised when Box Ships announced the issuance of 4.5M more shares of common stock on July 13.

Guess what happened? Some investors panicked. The stock price dove down at the opening bell. Smelling blood in the water, the shorting sharks circled and short interest soon more than doubled. The negative board buzz kept driving stock prices down for Box Ships, bottoming below $6.

Pardon the puns, but those abandoning ship were missing the boat. Those leaping into the lifeboats didn't take time to read the manual.

The July share offering was part of TEU's original plan, announced in the original Box Ships 2011 prospectus, to issue additional common stock to expand the fleet.

The bulk of the proceeds went towards the purchase of two more ships, the OOCL Hong Kong and OOCL China. Both ships came with 36-month period time charter contracts that will generate a net of about $57M. The average earnings/share for Box Ships should increase with these additions to the fleet.

And Chairman Bodouroglou, who already has significant skin in the game, pre-purchased additional TEU shares at the $7/share offering price. He also has warrants to purchase even more shares at $7.50/share.

I like to see that management has put their money on the line because they believe that shares are undervalued. One may estimate that true value is twice the current stock price because book value was $13.58/share at the end of June. That provides a huge margin of safety at this price.

Grab some bargains while you can

Significantly undervalued stocks don't come around often. I was pleased with my original purchases of both Yongye and Box Ships made at higher prices. And I was even more pleased to my positions after the price dropped.

As they say, the secret to success in stock investing is to “buy low, and buy even more lower”.

 

 


PhotoPhool has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend China Green Agriculture and Yongye International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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