Small Cap Stocks

The Chinese solar industry is the perfect analogue to the US financial industry. In both instances, you have many large companies that should be bankrupt, but due to various government schemes, and accounting shenanigans, have managed to remain afloat and in some instances provide triple digit returns during the recent market euphoria.

But don’t let the current financial Orwellinism scare you. As many have learned in the past six months, it is useless to fight against a tsunami of free government money, especially when its coming from China. Currently, the Chinese government is providing vast subsidies for its clean energy sector. Moreover, Chinese banks probably have a government mandate to lend money to Chinese Solar companies, irregardless of a company’s financial condition. In fact, it seems clear that the worse a company’s financial condition, and the more money it loses, the greater the likelihood that the banks will lend it more capital, and in turn the greater value Wall Street analysts will assign to the company. Though this type of twisted financial logic would have landed in you in an insane asylum a few years back, it is now a position implicitly espoused by our very own Fed and the Treasury.

The above situation has turned me bullish on the smallest publicly-traded China Solar play I could find: China Solar and Clean Energy (CSOL.ob). Since the company has been such a miserable performer, and management has displayed little ability to integrate new acquisitions, the stock now sits at $0.40, down over 80% the last two years. As always, the miserable performance, attracts my interest, since the stock price already appears to reflect this abysmal failure. Notably, the company sports an enterprise value of around $4 million (16 million shares outstanding), with zero debt, and nearly $3 million in cash. Interestingly, working capital was last reported about $10 million, fulfilling a classic value strategy of buying companies for less than their working capital. On the sales front the company appears to be doing between $30 million and $40 million in sales, and is modestly profitable.

Based on the numbers above, which are from recent SEC filings, it would appear that CSOL has limited downside at $0.40. However, on the upside, should the company succeed in garnering some attention via new clean energy deals in China, I would expect the stock to increase dramatically, especially given the low market cap and the continued hype surrounding China’s solar push. Ironically, it would appear that  CSOL’s main issue is that they have no debt, and are no longer burning cash, making the company a bad banking client, and an unlikely candidate for free government money. Nevertheless, at some point financial sanity should return, and if CSOL can deliver consistent sales growth, deal news, and profitability, investors may quickly bid up the price of this micro cap.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in CSOL. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.