Wednesday, 28 September 2016

IPDN and SPU are big movers: KBSF To Follow?

On August 15 we recommended to buy Professional Diversity Network, Inc. (IPDN) at 72 cents as it announced that it had entered into a definitive agreement to sell a controlling stake in PDN to Cosmic Forward Limited for $1.20 per share. We believed that it was an easy arbitrage opportunity and the stock immediately ran to around $1. Unfortunately, the stock plummeted back down after the company announced a reverse split. A reverese split is not always a bad thing, and IPDN has proven that today as just two days into trading after a 1-for-8 reverse split became effective, the stock has skyrocketed, hitting as high as $11.50 and is over $8 at the time of this writing. That translates to a split-adjusted high of $1.44 as it sits over $1. SkyPeople Fruit Juice, Inc. (SPU) is hot as well, up over 40%.

This is extremely fertile ground for one of other our top picks, in the same vein as IPDN and SPU, KBS Fashion Group Limited (KBSF). With our past history on tying IPDN and KBSF together and growing popularity thanks to winning trades on IPDN, PTLA and LPTN, we expect KBSF to get quite a bit of attention. As of this writing we are up to 44 followers who will get first peak into this article. If you want to get in picks like this early, make sure to click the follow button on the left hand panel so you get immediate access to our reports once we release them. We recommend that readers take profits on IPDN and flow those into KBSF as it has more upside.

Before we get into KBSF, one stock we strongly suggest to avoid going long on is Real Goods Solar, Inc. (RGSE) which has been trading in the millions of volume lately and was up over 100% yesterday. You just need to read the latest SEC filing to know why:

RGSE has convertible preferred stock with warrants, and what's even worse is that it has convertible debt and "The Company expects that Note holders will begin to convert all or a portion of the Notes into shares of Common Stock on or about October 1, 2016"

That's going to be incredible dilution and the stock price is probably being propped up for that reason only.

Now onto KBSF

This is mostly a re-print of an article released on August 22, because all of the information is still applicable. On August 23, KBSF hit a high of 65 cents but has since come crashing down to 40 cents, partially in response to what happened to IPDN. After the announcement of the reverse split on IPDN, both IPDN and KBSF sold off as people were doubting the integrity and research of our reports. With IPDN hitting new highs today, we have been vindicated, and we expect KBSF, this highly undervalued stock that has a low P/E and trades at well below its cash amount will follow suit with a huge price rise. Especially if an investment offer comes in that is similar to Cosmic Forward's offer on IPDN

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 August 19 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 40 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 $0.40 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?

IPDN has an upside of around 20% right now if you can pick up shares up around $8. 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 at the time of  pre-split $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 around 40 cents.

So the choice is a 20% 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.



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