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A difficult market for our puppies

October 17th, 2008 · No Comments

In the words of Jim Cramer, a lot of broken stock prices, but not necessarily broken companies. We think that the main companies we write about here, InterOil (IOC), eFuture (EFUT), Trina Solar (TSL), and more recently Chesapeake (CHK), and Sequenom (SQNM) all fall in this category.

There is indiscriminate selling, much of it forced, and the market is in the grips of primal fear. This is typically a situation when many opportunities also presents itself, as indiscriminate selling brings the good down with the bad.

  • While the global economic situation is unfolding, Cramer focused on the hedge fund industry as an opportunity in the making. He said hedge-fund selling is occurring at a record pace, with $43 billion in redemptions alone in September. With that gigantic amount of selling pressure, Cramer said the market is littered with broken stocks, but not necessarily broken companies. [The Street]

Lets go through them one by one;

We think that InterOil‘s future has never looked better. Yes, there are risks, the main one is that the LNG facility won’t find finance anytime soon, but as we argued today, we think that the economics is quite compelling. Our main disappointment is actually with the SEC. Their profitable retail business and refinery also provide a floor under the valuation.

eFuture is situated in perhaps the one environment which is still growing at breakneck speed (if we exclude the forclosure business in the US). China has made more steps recently to make their large domestic market a motor of growth now that exports are faltering. EFUT’s main customers operate in the retail market. Logistics still has a large room for improvements there. EFUT’s valuation doesn’t make sense to us at all, but this can happen to a small, hardly followed company in this environment.

Trina Solar is perhaps the company which might seem most directly under threat, with energy prices tumbling. However:

  • We think the price falls are temporary.
  • The need for alternative energy is based more on environmental and geopolitical issues than on price.

And, with a 2008 p/e of 4, we think any possible disaster has already been more than priced in.

Sequenom might have gotten a little bit of a scare of a competing product announcement, however this turns out to be much more expensive, and demand for easy testing of pre-natal problems like Down syndrom will hardly be affected by any economic downturn. The price is holding up reasonably well, it’s hardly ‘broken’.

Chesapeake Energy will weather the storm, gas prices in the US will recover as a result of cut-backs and a recovering economy, and in the mean time, they’ve been very proactive. Our main fear is that they will be taken over for a sub standard price.

We feel comfortable with recommending these names for the mid-term. They might have broken stock prices, they’re by no means broken companies. Comments welcome!

Tags: CHK · EFUT · IOC · SQNM · TSL