Monday, 22 August 2016

KBSF: Another Potential Runner Like SPU or IPDN

On last Monday's post, we recommended Professional Diversity Network, Inc. (IPDN) as a buy while it was trading in the $0.70's and had a $1.20 tender offer on the table announced that day. While the offer is still in progress, readers who got in early on August 15 or 16 have seen at least a 25% and up to 40% gain in a few days since as the stock trades in the mid-$0.90's now and as high as $1.05. The problem is some people may have bought IPDN at $1 after reading that report and are down about 5-10%. While they will still make 20% on this deal, they could have made a lot more had they known about it as soon as the report came out.  Same issue with Neovasc Inc. (NVCN). People who bought in upon our recommendation at 46 cents have made money since it's around 60 cents now. But those who bought at 80 cents a few days later are down.

We like to see only winners for everyone so we recommend that readers follow this blog by clicking the newly added follow button on the left hand side and buy quickly after a report is out to get a good price. Full disclosure, we have purchased KBS Fashion Group Limited (KBSF) at around 34 cents average cost. So should the stock price be 60 cents by the time someone is reading this, that person can take this buy-in price into consideration. This is a follow up post to one made on KBSF in June.

What makes KBSF such a compelling buy? First off, macro events have shown Chinese small float stocks to be very hot right now. Some like IPDN and SPU have spiked after a significant investment made by a fund or another large buyer. Even a stock like VisionChina Media Inc. (VISN) moved up over 50% out of nowhere on Friday before a halt. Second, like IPDN and SPU, KBSF is foreshadowing an investment relationship:

"After the first step of cooperation with Jiangsu Spring Fountain Networks Technology Limited, we may have further cooperation in the near future and upgrade to an investment relationship. Additional details of the transaction will be disclosed if and when a definitive agreement is executed by the parties. There is no assurance that the transaction will be eventually consummated."

Follow the link for the rest of the press release. This news was announced on August 17th so it is reasonably new. Even if the new deal with Jiangsu Spring Fountain Networks Technology Limited doesn't result in a strategic investment, it should result in a significant increase to KBSF's online sales. This is key because KBSF is already profitable, it just needs to continue on a growth path since revenue was basically flat from last year's Q1:

That last quarter ended March 2016 saw KBSF earn a 1.6 cent EPS. A 1.6 cent EPS on $9 million revenue in one quarter is a very good deal on a company with a 33 cent stock price and less than $9 million market cap. What makes this an even better deal is that KBSF is trading at far less than its cash balance and working capital (link to SEC financial filing):

The cash balance sits at $26.7 million. This is down from $29 million from March 2015, but the company paid off substantial debts during that time with current liabilities dropping from $16.5 million to $9.3 million. Working capital, current assets less current liabilities, has improved from $53 million to $54.9 million, indicative of a company that's profitable with smart balance sheet management. With 26.5 million shares outstanding, KBSF has $2.07 per share in working capital and $1.01 per share in cash. What's funny is that even though the balance sheet is strong and improved from last year, KBSF has dropped from $6.50 to $0.33 during this time. This also throws out the theory that KBSF will always trade at a discount like some other Chinese stocks do, because at this time last year it was trading well over its book value. It can just as easily return to that state again.

KBSF is certainly a company that could solicit a very lucrative investment relative to its current stock price. It also has the ability to implement a stock repurchase program failing a strategic investment.

Which stock is better? IPDN or KBSF?

We recommend holding both IPDN and KBSF but this is an interesting question for readers to decide should they only have enough money to put into one. IPDN has a guaranteed upside of around 25-30% right now if you can pick up shares in the 90 to 95 cent range and wait until the tender offer closes at $1.20. But we don't see the stock going much beyond that unless there is a short squeeze. Unlike KBSF, IPDN has a negative net income and has negative working capital when reviewing its latest financials filed with the SEC. So IPDN's value is derived completely from the tender offer and strategic investment made by CFL.

KBSF on the other hand, is deeply discounted, trading at less than one-fifth of its working capital and a P/E of about 5 assuming it earns 7 cents EPS in a year. There is no "guaranteed" minimum upside because no official buyout offer/partial strategic investment/stock buyback plan exists yet. But with or without an outside investor, KBSF has potential to give readers a big gainer. Just look at KBSF's price history. KBSF has bounced off the mid-30's price range to hit 69 cents or more on three separate occasions since June and a couple more times hit at least 55 cents. It is a great stock to trade for 50-100% in a relatively short time frame, even without considering the recent news and financials. The 52-week high is $6.50. Imagine if a strategic investment offer comes at KBSF's 52-week high just like one did at IPDN's 52-week high of $1.20? You could make 15-20 times your money under this scenario. But even if that never happens, 50% or 100% return or more appears to have a reasonable chance of happening on KBSF while it's under 40 cents.

So the choice is a guaranteed 25-30% return on IPDN which does not have great financials but does have a large investor supporting it, or KBSF which has no guarantee of a large strategic investment, but the financials support a stock price that could be 5 times higher, and the strategic investment could come at any time as the company has foreshadowed it and would make a lot of sense.

Update 8/23 11AM: KBSF has been wildly successful today, up nearly 100% to hit 65 cents before a pullback. We did sell some shares today, nearly half of our position mostly at 55 cents and above, and have since bought back shares between 45 and 52 cents in preparation for a second run. Where did the rest of the profits go? Into IPDN at 89 cents. KBSF's cash value is over $1 per share so don't believe the comments of shorts or other smartasses who call KBSF a pump and dump. Those types of people call every stock a pump and dump when it moves 30% or more, instead of doing proper research to determine fundamental value. 

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