We come across a number of timely buys and sells when we’re researching stocks for members of our Inner Circle service.
Here’s a particularly interesting question about SmartHeat (symbol HEAT on Nasdaq) from our latest weekly Inner Circle Q&A, in which I answer specific questions from our members. Like Sino-Forest, SmartHeat is a Chinese reverse-takeover (RTO) stock.
Q: Pat: Would you please take a look at SmartHeat? Thanks.
A: SmartHeat Inc., $1.03, symbol HEAT on Nasdaq (Shares outstanding: 33.5 million; Market cap: $37.6 million; www.smartheatinc.com), is a China-based company whose products are designed to make heating, ventilation and air-conditioning systems more efficient.
In the three months ended June 30, 2011, SmartHeat’s revenue fell 69.0%, to $7.1 million from $22.8 million. The company lost $0.17 a share, compared to a profit of $0.10 a share a year earlier.
Investing in China: Many of SmartHeat’s customers are having trouble getting loans
Customer orders have dropped off sharply. That’s because Chinese banks are providing fewer loans due to government measures to control inflation. As a result, the company’s clients must go through an extended process to get loans. State-owned businesses are having a hard time getting grants, as the government cuts back on stimulus spending. In addition, rising raw-material costs are hurting SmartHeat’s profits.
SmartHeat is a reverse-takeover (RTO) stock. Chinese RTO stocks went public by merging with North American companies that were already listed on U.S. or Canadian exchanges. That let them bypass the more rigorous initial public offering (IPO) process. Some RTO stocks are sound companies, but some (Sino-Forest is an example) have been accused of improper dealings. We do not know of any evidence of impropriety at SmartHeat.
It always pays to be wary of new issues, and that includes RTOs. They come to market when it’s a good time for insiders and/or the company to sell, but that may not be, and often isn’t, a good time for you to buy.
SmartHeat’s shares have fallen steadily from $8 in November 2010. That’s partly because of its falling sales and poor outlook, which could continue.
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