Out Fox The $treet

As the markets open on Monday in Asia, China has jumped another 17 points after a blistering start to 2012. The Shanghai Composite as already jumped roughly 15% from the lows in early January. Expect to start hearing correction calls this week. Sure that market needs a breather, but it isn't even back to the mid November levels. Difficult to see that as an over extended when looking over the last 6-8 months. Our models remain invested in China stocks ChinaCache (CCIH) and Lihua Holdings (LIWA) plus numerous other stocks that benefit from a soft landing in the economy and rebounding stock market. In addition, the market action makes us more interested in finding some China stocks trading is the US that haven't moved yet. Disclosure: Long CCIH and LIWA. Please review the disclaimer page for more details.

The Opportunistic Levered (Arbitrage on Covestor.com) model had another rough month. The model was again hit by fraud concerns among Chinese companies and emerging markets stocks fell due to concerns over inflation pulling down growth. Over the 29 months of tracking this model, it has had numerous months of 10% plus swings. Unfortunately some cases were to the downside. In those cases the stock holdings just got more attractive in the process. Even with China fraud scares, the three stocks owned in this model still appear to be worth more than our original purchase prices not to mention multiples of that. The size of declines in some of the stocks in this model caught us off guard. It didn't surprise us that June was weak, but the level of weakness in several sectors such as industrials and emerging markets such as China caught us off guard. Bottom Performers The bottom performers were again lead by the China stocks in the model. ChinaCache International (CCIH) and Lihua Int...

Copper remains on a hot streak and backs up our theory that global markets remain on a strong growth plan. It also highlights the issue with copper supply. Read just about any copper article on the internet and it'll summarize the difficulty that large copper mines are having with keeping production up. In many cases the production levels are down 10% from last year. So in essence demand growth remains strong and supply growth remains constrained. The media focuses on peak oil, but maybe peak copper should be a bigger focus. After all oil is still being found at a rapid pace in deepwater locations and shale formations. Oil production in the US is increasing for the first time in decades and shale gas is making the possibility of moving truck fleets to LNG a real option. Hence reducing the demand for gasoline from oil. Naturally Freeport McMoRan Copper (FCX) remains the favorite play in the sector. The stock peaked around $62 earlier this year and looks to regain that level soon...

Interesting to see a hedge fund manager actually bullish on Reverse Takeover (RTO) China stocks. Peter Siris is a partner at Guerilla Capital Management and has been an investor in China stocks for a long time. What gives him street creed in the current environment is that he has been short several China stocks including Longtop Financial (LFT ) that recently blew up. He didn't talk about Puda Coal (PUDA) in this interview, but he is an investors in the stock so he has done some due diligence on the company and likely visited them. PUDA should be announcing some news shortly on the $12 buyout offer from the Chairman. PUDA was a big investment in our Opportunistic portfolios so we're hopeful that Peter is correct. The $12 buyout would be much better than nothing, but we're still looking for a higher price. After a very one sided market, its nice to see somebody like Peter on CNBC's Strategy Session backing up my theory that the surviving China stocks will trade up. ...

May was a very rough month for the Opportunistic Levered model. It severely underperformed the market as China specifically and emerging growth stocks in general were hit much harder than the overall market. This trend will likely continue into June, but eventually will provide great upside potential as most of the stocks in these areas remain extremely cheap. Expanded Track Record Recently the track record was expanded back to January 30, 2009 adding a little over a year to the previous record. As one can see, the model can be very volatile, but the end result has been very good for anybody that remains invested. Sometimes an investor has to accept wild price swings in order to make long term gains. It is not uncommon for top stocks to drop more than 25% before eventually rebounding to higher prices. At times it can be worthwhile to cash out to avoid losses such as the recent sell of Limelight Networks (LLNW). The sell limited losses without incurring material capital gains impacts...

Last night Lihua International (LIWA) held an investor day at their HQ and manufacturing facilities. Ok, so it was really 10am local time in China, but it was at 9pm my time. The presentation portion included a video link for those that couldn't make the trip to be there in person. Since LIWA has been caught up in the Chinese RTO conspiracy ring, it was at least symbolically important for them to host an investor day for analysts and the media to get to meet the company management and tour facilities. The stock only bounced 2% on a very low volume of 102K shares showing how these events just don't resonate with investors that can easily discount anything they see as staged. What it will really take is analyst coverage from some major Wall Street firms or just time to elapse as the Chinese companies still standing will eventually be seen as legit. The presentation was mostly a rehash of the data from the Q1 call or in the Piper Jaffray China Growth conference from last we...

Early this morning, Lihua International (LIWA) officially reported Q4 earnings. The results were not much of a surprise after having preannounced on the 6th. The company reported sales growth of 164% for the quarter and 129% for the year. The company reported a whopping $.45 in earnings yet the stock trades sub $12. The company currently forecasts $53M in net income for 2011 or roughly $1.8 per share. The key though is that the company tends to underestimate earnings on a routine basis and they clearly point out a couple of drivers to higher earnings. First, the projections only forecast one quarter of sales from its new copper recycling facility. Second, the company is not assuming any reduction in costs of goods sold if they receive the importers' license. Both items will contribute to significant growth in 2012 earnings so the question really remains a mute point on whether 2011 garners more benefits. The importers' license will allow them to source scrap copper from int...

At first glance, it might not appear that a small Chinese manufacturer of copper wire for various industries would be that crucial to the Chinese small cap sector as a whole. The key is that the Co-CEO has made an offer to take the company  private for $11.50 , or roughly 20% above current prices. It could open the door to higher valuations in the sector as a whole, or maybe similar transactions across the sector as management grows increasingly tired of dealing with US investors that think every Chinese company is a scam. Read the whole article at Seeking Alpha .  Some of the comments on this article lead me to that a couple of other going private deals have been proposed. The more interesting is China Security and Surveillance (CSR). Something else worth following to see if the completion of these deals drives more investors into these stocks that offer extreme valuation. Hard to see these companies as fraud if somebody is willing to pony up $400M.  Disclosure: Lon...

Don't look now, but the China markets have been heating up the last 40 days. After a significant selloff following the highs back you November, the market had completely left China for the dead. That was clearly the wrong move. Lately it appears that China has been able to slow down its economy with PMI reporting the lowest total in the last 6 months over night. The Shanghai Composite is on the verge of  a significant breakout if 2,950 can be broken soon. A run back at the 3,150 high made back in November is the likely target. So while financial professionals are overly focused on the US markets and the Middle East, the lack of focus on the economy that leads the world these days has taken off. In that regard, our investments in China commodity plays like Puda Coal (PUDA) and Lihua International (LIWA) should perform well. Also, the recent purchase of ChinaCache (CCIH) appears ultimately timely a few weeks back. At the time CCIH was trading in very oversold levels, since the ...

Lihua International (LIWA) provided preliminary unaudited numbers yesterday that exceeded previous 2010 guidance. They also introduced 2011 guidance that basically met analyst estimates and provided for 30-35% earnings growth. Strip out cash and the stock trades for roughly 4x 2011 estimates. LIWA is leading Chinese developer, designer, and manufacturer of low cost, high quality alternatives to pure copper products, including refined copper products and superfine and magnet wire. Basically LIWA is in the sweet spot of the Chinese copper demand machine. Unfortunately though the market just doesn't respect the numbers they report. A few short sellers have done a good job in trying to scare the market though they don't appear credible. The stock remains a attractive pick of the Opportunistic models. 2010 Preliminary results Company expects revenue of  $370.5 million , representing growth of 129% over  $161.5 million  in 2009. Full-year gross profit is expected to...

After the markets closed today, Lihua International (LIWA) announced the approval of a $15M share repurchase program. This program equals roughly 5% of the outstanding shares. at current prices around $10. While not a big fan of small growth companies engaging in such uses of cash when they could potentially use the cash for further expansion, it might be prudent in this case to at least implement the program. Especially considering the numerous fraud allegations lodged at LIWA. One way to take advantage of such claims that have pushed the stock down from $12 to $10 is to buy the shares on the cheap. The company only has a forward PE of 5.7 so its definitely an accretive time to purchase shares. Once the stock gets back into the $14-15 range I'd hope that they just conserve cash for the next fraud allegation. If the company is a fraud, they wouldn't have the cash for such a transaction. Remember that $15M is relatively small for them. They expect to earn $40M in 2010 an...

Interesting comments on Lihua International (LIWA) by Global Hunter on t heStreet.com especially considering the negative story posted all over the internet claiming fraud. So far the fraud claims seem far fetched, but you never know. Also interesting that the fraud claim wasn't addressed especially since it appears this analyst has visited their sites in China. Global Hunter isn't a big name on Wall Street so I don't know whether this video will have a huge impact on Monday, but it will help to offset the negative story put out last Thursday. Though that story was just a rehash of previous reports from earlier this and last year it will help that it doesn't gather steam. The analyst from Global Hunter made some interesting comments about LIWA trading at sub 4x 2011 earnings. Thats nearly $3 in expected earnings next year. The street has been much closer to $2 all year so I'm leaning towards the analyst mis-stating the number then any real research suggesting t...

Lihua International (LIWA) remains a top investment in the Opportunistic portfolios as its recycled and refined copper products remain in high demand in China. Today LIWA upped copper anodes product shipments for 2010 and increased the demand for 2011. Considering that LIWA already had demand in excess of supply even after doubling capacity, this is more great news for the company that trades at roughly 6x '11 estimates. LIWA has already shipped 11K tons of copper anode in 2010 after only forecasting 8-10K tons back in October. Now they expect shipments of 12.5K tons for all of 2010. More great news that LIWA is exceeding internal estimates especially considering that demand continues to pile up. Total demand has now be raised to 122-134K metric tons up from the last estimate of 110K mt. Considering they expect to increase production capacity to 75K mt in the 2nd half of 2011 it appears that demand is approaching double that of their supply. LIWA has a ton of growth opportuniti...

Anybody following this blog should know that we've been bullish on Copper basically from the start nearly 2 years ago. Copper is an industrial medal in high demand in emerging markets. The basic thesis for rising prices is that supply continues to be constrained due to decreasing productivity from aging mines and a general lack of new mines topped by surging demand in China. The one wild card has been the demand level from the US. Decreased demand from the US over the last couple of years has helped keep demand growth in check. What happens in 2011 if US demand finally roars back with general growth and a return to homebuilding. Evidently Bank of America Merrill Lynch thinks 2011 will be a blowout year for copper. They are predicting a rise to $11,240 a ton up from the record of $8,966 reached on Nov 11. Thats a whopping 37% gain. Our only concern is that a big surge in copper prices might reduce demand. We'd prefer a much more manageable 10-15% rise. Otherwise copper could b...

TheStreet.com interviews Joe Giamichael, managing director and head of China research at Global Hunter Securities, about his bull case for the recycling sector in China. A couple of stocks that we follow in the recycling area include Lihua International (LIWA) for copper and China Aramco (CNAM) for iron ore. Along with Stone Fox Capital, Joe is bullish on LIWA. He provides some great details on the discounts for scrap copper and how cheap the stock remains. CNAM continues to be a play that we follow though it continues to struggle with its recycling facility.

Prior to the open today, Lihua International (LIWA) posted earnings that beat analyst expectations. With only a couple of analysts following LIWA, that generally isn't that worthwhile. While news that the company is upping full year guidance and that they see strong demand in 2011 is extremely useful. LIWA reported revenue of $96.3M which was 135% over last year. EPS was $.33 versus $.13 last year. Margins were lower due to the new copper anode products having lower margins but they provide a higher return on invested capital leading to a larger bottom line and huge growth opportunities. LIWA is a leading value-added manufacturer of copper replacement products for China's rapidly growing copper wire and copper replacement product market. LIWA is one of the first vertically integrated companies in China to develop, design, and manufacture lower cost, high quality alternatives to pure copper magnet and pure copper alternative products. Except for CCA wire, all other products ...

Today Lihua International (LIWA) announced a major supply contract for copper anode equivalent to nearly 40% of their expected 2011 production. Even more incredibly is the announcement of more then 80,000 metric tons is potential contracts which alone exceed the production expectations for 2011 even after building another facility. Guess this explains why the stock soared over 11% yesterday. Guess this news wasn't that guarded. LIWA along with several other Chinese reverse merger small caps continue to be the cheapest investments into the China economy. Yet most investors continue to avoid these stocks due to fraud scares as if the US market is that safe. LIWA also confirmed guidance for 2010 and expansion plans are expected to begin soon. This remains one of the best ways to play the expected copper shortage beginning in 2011 and the huge demand from Asia. Anybody concerned about fraud can limit the position to less then 5% or diversify among other China plays like LLEN, PUDA,...

Great summary information from the CEO of US Global Investors on the impact of China on Copper supplies. Copper is expected to be in shortage in 2011 due to the return of growth in the US and Europe plus the unsatiable demand in the emerging world. Amount of copper used in common household items: Average single family house - 439 pounds Air conditioner -52 Refrigirator - 5 Automobile - 50 As can be seen, growing domestic demand in emerging markets for homes, air conditioners, and automobiles will strain the supply of copper. Supplies are already dropping even though home building in the US is near historical low levels. Imagine when the US begins even normal levels of construction come 2011 or 2012.  Below is a chart from BMO Capital on the imports of copper from China. The numbers continue to surge making China by far the dominant influence on demand. Lihua International (LIWA) remains incredibly placed to take advantage of the looming shortage of copper...

After a few weeks of looking like the China market might just roll over and signal a move down in the market, the Shanghai Index jumped solid back into positive technical levels. Copper and oil have broken out as well so it appears that October is set up for some gains in the stock market as well. The two smallcap China stocks we own, Puda Coal (PUDA) and Lihua International (LIWA) also appear to be getting a bid. Makes us more encouraged to look at a China IPO tomorrow. More on that as the story develops.

Looks like Copper is going to break above the 52 week high of $3.6 and likely head back to the $4 range last seen before the financial crisis. Stone Fox has been pushing copper and such stocks as FCX, LIWA, and SLT. The interesting point about copper is that China now controls nearly 40% of demand and the US is around 20%. Assuming demand in the US rebounds it'll be the first time that the 2 biggest users are strong at the same time possibly putting a squeeze on the supply. See previous articles on the issues with supply. Below is a video last night from Mad Money with Tom Collins of TangleTrade Advisors discussing the bullish technicals of copper. Very much backed up by the trade today. Disclosure: Long FCX, LIWA, SLT