MBE Steps up to the Plate

With the sell-off from the past couple of months fresh in the memories of most, we move into more exciting times for holders. As I have previously described I am hoping a number of catalysts help give momentum to the share price over th year. One of these catalysts is the half year results that are just around the corner (this week or next).

When the market was updated about expected results last year the share price found its way to 44c. MBE are known for underpromising and over delivering. Therefore, I'm expecting some upside to the announced revenue of 27m, EBITDA of 3.5m, and underlying EBITDA of 7.5m. However, we all know the market is forward thinking. The market already knows what's coming and has priced it accordingly. So why the huge retrace?

I think the retrace is the result of a number of things including buying by an institution or two. They have cleverly used the recent market turmoil to try and drive the share price lower while they accumulate a position. This has resulted in a lot of weak hands letting go as the SP drops. After closing below support at around 29-30c the SP swiftly recovered to back above 30c. I can now see a possible rally leading into results as buyers try to build their positions prior to the earnings announcement. I see a decent spike following earnings as this is usually the case for MBE.

In summary, I think momentum will start to turn over the next week leading into results and in a month or so we will have seen a rerate possibly back into the 40s. The current market turmoil may take a bit of steam out though, which could offer buying opportunities for a bit longer. I'm confident by the time the year is out we won't be anywhere near 30c. If we are, I'll be accumulating.

Update on the Research

I haven't had a lot of time to research any new companies lately. I have 20 or so that I have come across (and know nothing about) that I plan to have a quick look at. I'm about to sit down (in front of the Blackcaps chasing down Pakistan's 290) and look at these. Hopefully a couple will warrant a more in depth look and be an option for my 20k challenge portfolio.

A Theory on TFC

A Theory on the TFC Share Price

TFS Corporation (ASX:TFC) as a company has got stronger over the past couple of years. However, after a rerate two years ago the share price has gone backwards. Normally, I only focus on company fundamentals and not worry about the share price. I know if I've done my homework well the share price will take care of itself.

I still have the same belief in TFC. 

This quote from John Maynard Keynes is one of my favourites: "Markets can remain irrational longer than you can stay solvent". So here is me trying to explain what is most likely the market being irrational.

TFC are exposed to commodities. Their specific commodity is Indian Sandalwood. The market price of Indian sandalwood has gone up for the past 20 years. TFC are the only company that own a sustainable source of Indian Sandalwood. They also have long term agreements in place at $4,500/kg of oil (and more to follow), which is almost double the current market rate. And there it is, the word "oil". 

Take a look at the next two graphs. The first is the short rate of TFC. That is, people that are betting the share price will go down. The second is the crude oil price.

It may be a coincidence, but there is definitely a corelation between the two graphs. Does the market actually see a relation between the two? I cannot see any reasonable explanation. However, 8% of the total number of shares have been shorted.

Those that believe in the TFC story have a great opportunity to buy some shares on sale. With the strong fundamentals, and the potential that any significant price movement will force people to cover  short positions we could see a significant rerate in the not too distant future.

Entry Point Support Holding for MBE and TFC... So far

The timing of my purchases of MBE and TFC was based the recent price action. It goes without saying that my purchase price was attractive to me from a fundamental point of view.

MBE

MBE was oversold on the RSI, had just filled at gap between 29 and 29.5c, held above an old resistance line at 29c and bounced off the 200 day EMA. There was also good buy depth at 29.5 and 30.

A few days have passed and support has been tested and held a few times with good buy depth still at 29.5 and 30c. It looks like we have found a temporary bottom and evidence is building that the bottom has been found, however, tomorrow will be telling after today's 30c close.

TFC

TFC was a similar story to MBE. Hit oversold on the RSI after a big sell-off. Support rushed in at 129-130c and has held for a few days. There was a nice bounce today to close at 134c. There has been growing short interest in TFC over the past two years, and any sizeable rally could mean some short covering.

XPD Soccer Gear - What Gives?

As part of a screen I ran I came across XPD Soccer Gear (ASX:XPD).

On the face of it, this company ticks a lot of boxes. For starters it is growing quickly and has a PE of only 6, and has plenty of cash to cover its debts. This got me excited so I continued with my research.

The company is a Chinese company that listed on the ASX through a holding company in Hong Kong. They are in the business of selling soccer gear to the rapidly growing Chinese market (great, right?).

They listed on the ASX last year to raise $5-15m to fund growth. This is a relatively common thing to do. However, before listing, the company already had around $20m cash on the balance sheet. They are also highly profitable. So why go to all the effort of listing and diluting ownership to raise such a small amount? The short answer is I don't know. I simply cannot come up with a good reason for this. They seem to have plenty of cash to fund their own growth, so why go to the market now?

They reported they were to build another factory to allow for growth, however, this has been pushed back without reasonable explanation.

There is a history of some Chinese companies overstating things to their overseas investors. There's been cases where financial results have been completely fabricated. I'm not saying this is the case here, but we should proceed with caution. Getting money out of China to overseas investors can be difficult. 

Trying to justify what the market is doing is not usually recommended as it will lead to bad investment decisions. However, I ask myself why it has applied a low multiple to the company. I can only assume this is due to the risks I am worried about.

Everything could be OK with XPD, I have no evidence to prove otherwise. There are just a few things that smell a bit to me and that's enough to stop me from investing. I will periodically look up the stock to see how it's tracking. Is it be too good to be true? Only time will tell, and I will find out, either way, from the sidelines.