China Energy Corp (CHGY.OB) 4/5/09: The Next Perfect Stock

Once gain, I've searched the stock market and think I may have found another perfect stock. My selection of Pier One (PIR) on http://theperfectstock.blogspot.com/ worked out pretty well to say the least. Although Hayes Lemmerz (HAYZ) has yet to reach its full potential (in my opinion), the stock went from $0.16/share to $0.29/share less than a week after that article was posted. That's an 81% gain! I continue to get a lot of positive feedback, so the pressure stays on to select only the best and brightest stocks. My next choice is slightly riskier because it is an international stock and it isn't listed on a major exchange. However, I implore you to keep and open mind and let the facts guide your opinion. My choice for the next perfect stock is China Energy Corp (CHGY.OB).

China Energy Corp is a company that produces and processes raw coal for heating and power generation in Inner Mongolia. Without boring you with details of their total operation, the main revenue driver is their coal production. Before the nay sayers begin their criticism of this stock, let me be upfront with some perceived negatives of this company:

• A lot of people just don't trust Chinese microcaps for whatever reason


• The company's website is currently being redone, so it's not active


• The balance sheet's not that great due to recently upgrades in their coal mine

Okay, now that I've got that out of the way, let me tell you why I think this stock could double or better in the next 2 to 3 weeks.

Fundamentals:

We all know that no country has been immune from the recent economic challenges. Even China, which has fared better than most, has seen a sharp decline in growth. Despite this negative trend, the country continues to be starved for energy. The most sought after energy source happens to be coal. China depends on coal for about 75 percent of its annual energy production and consumes about half the world's coal. Finding a buyer is never an issue. Customers are willing to buy how ever much a company is willing to sell.

Momentum:

Energy stocks in general have begun to trend up after a massive drop. Oil is now solidly over $50/barrel and coal stocks have clearly been participating in the rally. Most of these stocks have seen at least 30% gains since the beginning of March 09. This uptrend is clearly seen in the 1 month chart of the Market Vector Coal ETF (KOL) below:

News:

In December 2008, CHGY.OB finished the production expansion of one of its coal mines. The annual coal production is scheduled to increase 80% from 500,000 tons to 900,000 tons per year. Also, after a precipitous fall, the price of thermal coal finally leveled out and has recently shown signs of an upward trend.

China Energy had a dismal 3rd quarter in 2008 caused by mine preparations, production halts due to the 2008 Summer Olympics, and the overall sentiment of a slumping economy. However, the company responded in quarter 4 with much better production numbers and an EPS of .09/share. On word of that news, the stock's price jumped significantly off its all time low of $0.04/share 3/16/09. Keep in mind that 2008 quarter 4 numbers still did not include production from the mine expansion. Quarter 1 2009 will be the first results actually including the new production. Due to ramp up adjustments, the true production results of the expanded mine won't be revealed until quarter 2 2009. Using a conservative coal price estimate of $60-$65, the earnings in quarter 1 2009 should far exceed those from quarter 4 2008. The balance sheet should quickly improve and for the next year or two, this company will be a true cash cow.

Technicals:

Look at the chart below for CHGY.OB.




You can see the stock bottomed in mid-March and followed with a parabolic spike after the release of quarter 4 2008 earnings. What occurred next is a classic "cup handle". The stock dips as the day traders and quick flipper exit. Then, it slowly ramps back up on lower volume as investors begin to evaluate how much of a steal this stock really is. The sellers dry up and then the stock is consistently hit with accumulating buyers.

According to China Energy's latest SEC filings, it has 45 million outstanding shares. Approximately, 41.5 million shares are held by insiders who have yet to sell. That only leaves about 3.5 million shares for the trading public. Look at how heavily weighted the "blue bars" (which represents buys) are on the volume portion of the chart above in the last week. Based on the amount of buys, how cheap the shares are, and the number of shares traded the past two weeks, the float is incredibly thin. With Quarter 1 2009 earnings due out in less than 2 weeks, CHGY.OB has the makings of a rocket waiting to blast off.

Conclusion:

A conservative EPS estimate for CHGY.OB in 2009 is $0.40 - $0.45. With its stock price currently sitting at $0.23/share, you're looking at the current year PE being a ridiculously low 0.5. An EPS of around $0.11 is expected by those of us who follow this stock closely for the upcoming quarter. However, very few people know anything about this stock, so these huge earning growth estimations are flying completely under the radar. I do suspect that some eye brows will be raised when China Energy's 10Q is filed some time around April 15 and people see 300% - 400% year over year gains in earnings. Sure, you could find some faults with this company, but I say the technicals and earnings make this the next perfect stock.

I had mentioned in a previous post that I might at some point include some stock market trading tips on this site. After contemplating that idea, I decided that it would be best to put those things on a separate blog. This blog is at http://yourtradingtips.blogspot.com/ and the first post deals with finding trading or investment relevant news. Check it out when you get a chance.

Happy investing!