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Sterling
Small Cap Review for July 1st, 2008
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Position
Statement: In our Small Cap Review newsletter we attempt to identify small and micro cap companies that we feel are undervalued and have a good chance of
moving higher. When we write about a company, please do not assume that it is a buy recommendation. We will have stocks in the “watch” category, the “buy” category, the “hold" category, the “sell” category and the “you have got to be kidding” category… this is reserved for companies that we have identified as having a highly unlikely story, or, has shown a propensity to stretch the truth to a state hitherto unknown to mankind. The Sterling Small Cap Review is distributed via. an "opt-in" email distribution and through our website www.sterlinginvestments.com |
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Today’s Comments: The overall
market finished Monday sharply lower. It continues to be under pressure due to a combination of factors including high oil prices, credit market concerns, and dollar weakness. However, market pullbacks should not be thought of as the end of the world, but as a chance for an opportunity. In terms of the broader market, it looks like the Dow Jones Industrial Average may be approaching an area of downside support at approximately 10,747.36 If Dow Jones Industrial Average finds support at that level, it may signal a buying opportunity. However, please keep in mind that small and microcap companies do have a tendancy to move independent of the broader market.
In this week's Small Cap Review we are looking at a company that bears watching for some potential upside surprises.
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Recommendation: Watch
Gulf Resources, Inc. (GFRE.OB)
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| Company: Gulf Resources |
Symbol: 'GFRE' |
Closing
Price: $1.90 |
| Web
Site: http://www.gulfresourcesco.com |
YH: $3.19 YL: $0.90 |
Forecasted
EPS: $0.25 |
| Shares
Outstanding: 99.6 Million |
EPS: $0.16 P/E: 12 |
Market
Cap.: $189 Million |
| Dividend: N/A |
Yield: N/A |
Average
Daily Trading Volume: 11,600
Shares |
Company
Description:Gulf Resources, Inc., through its subsidiaries, manufactures and trades in bromine and crude salt in the People's Republic of China. Its bromine compounds are used for industry and agriculture applications, as well to form intermediates in organic synthesis. The bromine is used in brominated flame retardants, fumigants, water purification compounds, dyes, medicines, and disinfectants. The company also manufactures and sells chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, wastewater processing, papermaking chemical agents, and inorganic chemicals. These chemical products include hydroxyl guar gum, demulsified agent, corrosion inhibitor for acidizing, bactericide, chelant, iron ion stabilizer, clay stabilizing agent, flocculants agent, remaining agent, and expanding agent with enhanced gentleness. In addition, it engages in the research and development of commonly used chemical products, as well as medicine intermediates. The company is based in Shouguang City, the People's Republic of China. |
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Our
Analysis:
In every special situation, one of the things wise investors look at is the barriers to entry, meaning how difficult is it for new players to enter the market in order to compete. The more barriers to entry, the less likely it is to see eroding profits from the companies that increasingly inhabiting the space. Nowhere can we find a more powerful barrier to entry in the micro cap space as we see with Gulf resources.
Who is Gulf Resources?
Based in Shandong province, Gulf Resources, Inc. is a leading provider of chemical products in the People’s Republic of China through its two wholly-owned
Subsidiaries:
1-Shouguang City Hao Yuan Chemical Industry Co., Ltd., a manufacturer and distributor of Bromine and crude salt. This subsidiary contributed 75% of revenues in Q1 2008 and 79.5% of net profit.
2-Shouguang Yu Xin Chemical Industry Co, Inc., a manufacturer of chemical products utilized in oil & gas field exploration , papermaking, and others.
What is Bromine?
Bromine is a chemical that can be economically extracted in only 3 areas of the world: The southern US, Israel/Jordan, and China. China’s demand for bromine still outweighs demand, and bromine prices have been steadily increasing . Bromine is used in the manufacture of fumigants, flame-retardants, water purification compounds, dyes, medicines, sanitizers, inorganic bromides for photography and other items. Some products have higher profit margins. The company has developed flame-retardant agents and is developing new products which utilize bromine.
What are the Barriers to entry?
The short answer is the government of China. In July 2006, the central government of China issued a decree ordering the end of further issuances of bromine exploration licenses, which stood at only 6. This mandate led to the closure of several highly profitable bromine facilities in the Shandong Region. Gulf Resources was successful purchasing several of those facilities at prices that ranged from 3.5x earnings to 5x earnings. Gulf resources now controls close to 20% of China’s bromine production.
Making it the market share leader in China.
We are almost ready to put a “buy” recommendation on Gulf resources, but based on the current chart, we will keep it on the “watch” list for now. We are expecting a short period of continued weakness, and the next catalyst for share price appreciation is not expected until mid August, when Q2 earnings are expected. Of course, additional acquisitions would certainly be a catalyst, but there is no indication from the chart that any news is imminent. We have a 12 month target on GFRE of $4.00 and a 24 month target of $6.
If you wish to learn more about GFRE, you may contact William Gamello at McGinn, Smith & Company. He has been identified by the editors as being a broker that is knowledgeable about this company. He can be reached at 800-689-1660 |
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Copyright
1992-2008 Sterling Investment Services, Inc.
P.O. Box 191767, Atlanta, GA. 31119-1767
Fax 404-816-8830
404-816-8240 |
Disclaimer:
The Sterling Investments series of newsletters is produced by Sterling
Investment Services, Inc. All information
used in the production has been obtained
from sources believed to be reliable and
accurate. Sterling Investment Services
does not warrant or assume any liability
for inaccuracy of the information used
to produce our publications. To receive
further information on these services
please visit our web page at: www.sterlinginvestments.com
If you would like to contact us our fax
# is (404)-816-8830 Email address is:
enelson@sterlinginvestments.com Sterling
Investment Services may hold positions
in the securities recommended or may be
providing consulting services to the companies
mentioned within this report. |
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