Shade Capital Management

Goldman Sachs usually provides investors with strong returns from IPOs it lead underwrites. However, China Nepstar Chain Drugstore (NPD) turned out to be one of the biggest disappointments to the firm's credit.

Since coming public in November of last year at more than $16 a share, NPD has cratered. Last week, the stock may have reached a crescendo in price depreciation by hitting an all-time intra-day low of 3.87 following the company's Q2 earnings report. This capped off 17 straight days of selling on the unpopular drugstore chain.

I know how dangerous catching a falling knife can be for any investor or trader. However, in the case of NPD I ignored this sound advice after finding out the company is going to conduct $40 million a share buyback over the next 16 months on the open market and it will not alter its 2.5% dividend to stockholders. The dividend information and a majority of any other NPD business developments mentioned in this article are contained in the corporate earnings transcript supplied by Seeking Alpha. These two events were signs of confidence from the company that things are not as bad as the stock price would have them appear.

The company also continues to grow both organically and through acquisition, building 234 new stores in the recent quarter and announcing in August to buy 42 drugstores from Kangjie, a competitor. These stores are based in Qiangdong, where Kangjie was the second largest drugstore chain in operation. NPD will have over 2500 stores upon closing the deal.

Additionally, I am not the only one holding beaten down shares of NPD. Yahoo Finance reports that Goldman Sachs in its June filing is still holding 25 million shares, approximately 23% of the company.

Don't be mistaken, China's largest drugstore chain has its share of concerns. For one, China drugstores don’t run like American drugstores. Federal regulations can be onerous and the pharmacy operation is not quite as lucrative and profitable as in the U.S. So to compare it to a Walgreens or CVS just yet would not be quite accurate. Also, China is experiencing inflationary concerns in its overall economy which company management did point out caused the company some difficulty with rising SG&A, particularly that surrounding store rental and labor costs.

Finally, the company has had inconsistent margin growth, with the recent quarter showing some slight weakening in that area along with same store sales comps being down more than one percent YOY. Management attributed some of this to bad weather and natural disasters. Regardless of the excuse that number needs to turn positive and sooner rather than later.

Despite the issues mentioned above, I just find too much negativity already priced into this one. Sporting a $500 million market cap, NPD is now trading at approximately 1 to book and a forward PE of 14. I regard it a speculative buy with a small position in the low $4s. If this current bottom holds, I may add more in this range.

When to sell this stock? I have taken flack in the past from readers regarding the selling of a sliding recommendation, and with this as any other stock pick I think it depends on the individual, his discipline and appetite for risk.

It would be hard to find another restaurant that was hit harder by the "stealth recession" that recently submerged the U.S. economy than Ruby Tuesday RT (7.88). Plunging from a high of $30 a year ago, the stock finally bottomed around six bucks back in January.

The past few months has seen the company management stage a valiant effort to prop up the stock price and right the ship. Heavy insider stock buys by officers and management in January were coupled with an intense focus on corporate branding to improve store image, service and product quality. During the company's earnings call last evening, the major branding effort underway was highlighted.

The management also pointed out that in addition to renovating both the restaurant's physical locations and reputation it was in cost-cutting mode. In fact, it told Wall Street analysts because of management's fiscal prudence the company projects to be cash flow positive starting in 2009. It was a pretty daring call considering the current economic malaise that is plaguing all retail restaurants right now starving for a confident consumer.

After all, that is the big question facing the entire restaurant industry. When consumers really start to have, and more importantly feel like that they have, more money back in their pockets, where will they spend it and which establishments will be best positioned to profit?

Judging by the earnings call, Ruby Tuesday may be able to pull it off and complete the turnaround. To succeed, the company plans to open only two new stores in '09, while trying to continue posting solid check totals and maintaining restaurant margin levels at 18% or better in same store sales.

I still remain leery of this stock. I see no reason to rush in until the cash flow positive outlook becomes gospel. After all, the restaurant industry could continue to see consumer fallout as the economy slows further, which would be capped with a sharp rise in unemployment. This usually is one of the final realities recorded at the end of a noteworthy recession. Also, Ruby Tuesday competes in numerous smaller regional markets with an average of $3.5 million in sales for those locations. A deeper recession could adversely impact these smaller markets. Finally, the labor and food costs from now going forward will have a gigantic negative impact on all restaurant margins. These concerns were touched upon in the conference call, with the company pointing out that its beef costs are locked in through February 2009.

So with all these intangibles weighing on the future of this company, to buy now would prove to be a bit of a gamble. I would wait for that first quarter in '09 to see what is cooking over at Ruby Tuesday as the stock could see retest of its lows before things actually start to improve.

It seems like only yesterday when those exotic energy stocks featuring diversified operations and fictitious balance sheets were the darlings of Wall Street. Companies like Enron, Mirant and Calpine were "must haves" in every investor portfolio. Then as quickly as these companies share prices rocketed to extraordinary valuations, they cratered leaving scandal and bankruptcy behind for any of the bagholders still remaining.

Now, following a humbling tour through the bankruptcy process and a brief stay on the pink sheets, Calpine (CPN) has emerged back on the NYSE earlier this month. Propped up by a new cadre of investors and entering the market at a time when clean energy solutions are being highly ought after by investors, CPN may be able to redeem itself as a viable investment the second time around.

According to the corporate website, Calpine is a major U.S. power company. The company claims to deliver approximately 24,000 megawatts of clean, cost-effective, reliable and fuel-efficient electricity to customers in 18 states. The company owns, leases and operates low-carbon, natural gas-fired and renewable geothermal power plants.

Granted, CPN's last substantive financial filing was a 2006 Annual Report. So the financials and fundamental details surrounding its issue may not be as current and clear as most investor's prefer. Also, there are no analysts at this time covering the stock.

The company realizes this can hinder new investors from taking a position. Thus, it is conducting an analyst meeting on Friday, Feb. 29. I will wait until after the event to make an opinion on the stock.

The nature of business is cyclical. No matter what.

Take the oil sector for example. Despite the hype and fear being promoted by peak oil theorists, the sector is correcting. The price of crude oil is surging to new highs while many oil companies in the DJIA and S&P 500 have not experienced the same type of explosive price action. This lack of investor enthusiasm to boost oil companies to new highs demonstrates the correction is already under way.

Draw a comparative chart using these three symbols: DIG (ETF Long of DJIA and S&P 500 oil/gas companies), DUG(ETF Short of DJIA and S&P 500 oil/gas companies), and USO (ETF reflecting price if Texas Sweet Crude). For more than two years, DIG and USO moved higher in unison, with DIG performing consistently better than USO during that time. However, the past month shows a clear divergence in direction between the stock price of USO and DIG. In fact, DIG has crossed below USO and continues to struggle while USO keeps inching higher. Meanwhile, DUG has started to bounce off its lows significantly and shows strength despite USO pushing to new highs.

To me, this comparison demonstrates that the price of oil no longer works as a catalyst for driving oil company stocks. This separation between the price of oil and the companies that provide it only serves as a warning to those invested in the sector. No matter the price of crude, oil stocks should suffer. Arguably, if oil continues to jump to stratospheric leveles it will definitely cut into consumer demand hurting oil company sales and if oil prices begin to settle to more realistic levels based on fundamentals, prices should decrease hurting the bottom lines of oil companies.

I also believe the growing separation between the price of oil and the companies that find, produce and sell it show how speculative oil has become. Although crude oil may go higher in the short run, I would say the risk/reward ratio to investors in crude is unfavorable.

I compare this current price correlation between oil and oil companies to that of lumber prices and housing stocks in late 2004. In comparative analysis, lumber prices continued to run ahead of the housing stocks as each continued to hit new highs at the end of the housing bull market. Once the price of lumber contracts crossed below the price of the housing index a top was signaled. Within two years, the housing sector and lumber prices were decimated.

What this delineats is that once a pattern involving stock and commodity prices emerges during a sector's rise, one only has to look for a significant deviation from that pricing pattern to signal a top.

I recommended Sutron Corp. (STRN) on my website back in June as a possible hurricane play. In hindsight, the stock could actually offer more than that. This $52 million microcap company actually gives investors a potential long term growth opportunity to profit from some of the problems that could be attributed to the rise of global warming.

STRN provides meteorological, oceanic and hydrological products and solutions that allows for the monitoring and managing of water resources. The equipment works to collect and analyze data that works to warn us from floods, storms and tsunamis. The company customer base consists primarily of government agencies and that list is steadily growing.

When the company reported record revenues two weeks ago, it mentioned a great outlook for the upcoming fourth quarter. This was in part due to the company's starting of shipment to its newest client --- the Afghanistan Water Ministry. This $6 million deal was highlighted by CEO Raul McQuivey along with two other major announcements involving projects already completed. One featured a deal with China for the Three Gorges Dam project totaling approximately $956,000. The other project featured water level, snow, rainfall and water quality monitoring equipment being shipped to Washington International Group in Boise, Idaho to be provided to the Iraq Ministry of Water Resources. This shipment totaled approximately $2.23 million.

The company remains largely under the radar screen of analysts, but STRN experienced healthy YOY increases in revenues, gross margins, earnings per share and customer orders which caused investors to take notice. The stock has moved from $8 in June to an all time closing high of $11.67 on Friday.

One of the only drawbacks to STRN is its particularly small float of 2.7 million shares. This makes it difficult to take a large position as the bid/ask spread tends to widen quickly and shares are hard to come by. Nevertheless, it may be worth the hassle of setting up those limit orders because as global warming continues to impact planet earth weather will become only wackier and natural disasters more prevalent. All this could translate into more demand for STRN's products and solutions.