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Two Better-Late-Than-Never Plays on China Growth and Natural Gas
By Michael Brush
Exclusively for InvestorIdeas.com
April 24, 2008
Spend enough time hunting for investment ideas, and inevitably you will look back in awe at the ones that “got away.”
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The only mistake worse than crying about missed opportunities is to compound the error by avoiding the stocks as additional buy signals come in -- just because you didn’t get in earlier.
To anyone who has missed the respectable gains to date in China Security & Surveillance Technology (CSR) and Contango Oil & Gas (MCF), I’d suggest avoiding that mistake. Instead, follow the additional buy signals that just came in on both stocks and get some long exposure. Let’s look at the China security play first.
China Security & Surveillance Technology
As China’s economy rocks on, demand for security and surveillance systems is growing rapidly. China Security & Surveillance Technology offers a pure play on that trend.
Based in Shenzhen China, the company itself has grown rapidly by snapping
up over a dozen smaller companies that install or manufacture security systems, in this highly fragmented industry.
Chief Guoshen Tu gave us a compelling buy signal when he purchased $3.6 million worth of stock on March 20 and 21 at just under $14. A week later, the company announced a $114 million contract with Jining City, population 8.1 million, to install security cameras and related equipment. The stock jumped 8% on the news to trade above $17 and than advanced through $19.
Don’t kick yourself, get long
At this point you can either kick yourself for missing the move so nicely foreshadowed by Tu’s buying. Or you can notice that he just bought another $290,000 worth of stock for about $19.30, or around the current price. Then buy some stock along with him.
By the way, in case you think his first big purchases just ahead of the Jining City contract warrant scrutiny, he made the buys under a 10b5-1 stock purchase plan. The plan allows him to buy stock automatically -- even just ahead of material news.
Growth drivers
Given the strength of his buying and the macro trends in China, my guess is that other market-moving contracts will follow in time.
Thanks to growing demand for security and surveillance at places ranging from airports, courts and prisons, to sports arenas, mines, railways and entertainment venues, demand for security products in China will grow 20% a year for the next several years, according to the Chinese Security and Protection Association. By 2010, it should be a $160 billion market.
Here are some of the main growth drivers:
- An increasing divide between rich and poor drives demand for more security in places like residences and shopping centers.
- The Chinese government is still spending for security surrounding the 2008 Beijing Olympics. And after that it will do the same for the Shanghai 2010 World’s Fair.
- Government rules call for street surveillance in high-traffic areas in 660 cities.
- Other rules call for surveillance systems in entertainment venues like discotheques, bars and cyber cafés.
- Government rules also call for surveillance to protect workers and detect unsafe air at all of China’s 24,000 coal mines.
These kind of growth drivers – plus acquisitions – help explain a 124% increase in sales at China Security & Surveillance last year to $240 million. Operating income grew 68% to $42.65 million and net income was up 54% to $12.4 million. It might not keep pace with those numbers, but Tu’s buying suggests the company will continue to do well.
Contango Oil & Gas
I first spoke with Contango Oil & Gas chief Kenneth Peak back in the summer of 2004. He had just made a sizeable purchase of $350,000 worth of his company’s stock at $7 a share. He came well-recommended from a reliable source inside the energy sector. Peak outlined plans to explore for natural gas holdings in the Gulf of Mexico, with the usual caveats.
Fast forward four years, and his stock is a ten bagger, trading recently at $76 per share. Peak’s search for solid natural gas finds in the Gulf of Mexico proved successful.
At this point you can kick yourself for missing the move.
Or you can pay attention to a recent round of $5.1 million worth of purchases of Contango stock by Sellers Capital. This is an investment shop that poured multiple millions of dollars into Contango in the past few years in the upper $20 range through $45 a share.
The fact that Sellers has done so well with earlier purchases and is still buying despite the near parabolic rise in Contango stock suggests there is plenty more room for upside.
Peak’s plan now is to spin off the Gulf of Mexico holdings with known natural gas reserves, and give shareholders an interest in exploration efforts at other Gulf of Mexico leases through a company to be called Contango Energy. The recent buying by Sellers Capital suggests there is plenty of potential in those other leases.
The bottom line: Don’t let the fact that you missed a big part of a move in a stock prevent you from profiting from further upside. Recent insider buying at these two big movers suggests more gains ahead.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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