Our Top Stock Idea

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Lihua International Profile

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
Lihua Int'l (LIWA) is an undervalued China play, a bimetallic and copper wire maker in the world's fastest growing market for bimetallic and copper wire. UltraLong has laid out in more detail and superior writing the case for China's overall stock market being undervalued. He mentioned LIWA in passing, along with some breathtaking numbers, and I looked into it. Unlike a disturbing number of Chinese stocks, LIWA's reported cash flow is comparable to its reported earnings, which are more than 1/10 its market cap, and almost 1/6 its EV. (Yes, its market cap is higher than its EV, because it has a crap tonne of cash on its balance sheet.)

So what? With negligible debt, a history of >40% earnings growth and >50% revenue growth, such a valuation is ridiculous, unless you just don't trust Chinese people. It's possible that all Chinese bookkeepers are lying. But that seems less likely in the case of Lihua, who isn't channel stuffing to any significant degree, than in the case of your typical fly by-night Chinese stock. (Channel stuffing is when a company reports increases in sales and earnings when they take orders and record them as sales/earnings before getting paid, and instead of having real money, they just put the IOU on their books, calling it "Accounts Receivable," and act like it has value. I found a lot of it when I researched "fast-growing" Chinese stocks.)

Another good sign is how closely the free cash flow, subtracting out cash from stock sales, matches reported earnings pretty closely. They make cash, they report it as earnings. That's pretty much the way it's supposed to go. Throw in the 45-50% growth and PEV (price to enterprise value) of about 6.5, and you have what I believe to be an All Star stock.

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