10 Micro Cap Value Stocks - Or Are They?

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On a monthly basis I conduct a close replication of AAII's (American Association of Individual Investors) Shadow Stock screen. The goal is to find small, undervalued stocks with high price momentum over the past 52 weeks. It is a highly speculative, risky strategy that can potentially undercover a hidden gem or two.

The screen and date below is courtesy of Stockscreen123. I use the following screen criteria to identify high momentum value stocks:

No over-the-counter stocks

No financial stocks

Market cap > $20 Million and < $200 million

Previous EBITDA quarter and trailing twelve months are positive

Share price > $1

Price/book < .80

Price/sales < 1.2

Top 10 stocks are selected based on highest 52 week returns

Minimum average daily volume > 5k shares

The results for this month are at the bottom of the article and last month's list is here. Much discussion and investigation has occurred in recent week and months about Chinese firms trading in the US markets. The Chinese companies under the most scrutiny are those which began trading in the US via reverse mergers, which is the practice of a private company acquiring a public company (many times penny stocks which have little or no value) in order to bypass the lengthy and expensive process of going public. Allegations (and in some cases proof) of accounting fraud have plagued the Chinese small-cap sector, especially those companies which began trading via reverse mergers. The Street has been tracking the reverse merger soap opera and their recent update is here.

How can an investor avoid getting duped by fraudsters? The easiest option is to avoid investing altogether and store your assets in the ground or in hard assets. In today's market you could avoid markets where the concern is greatest, Chinese small-cap stocks. An easier method is to let the market tell you when concern begins. Using a trend method to determine when and how to invest is one way to follow what the market is telling you. When a stock breaks below a long-term moving average (such as a 200-day, 50-day, 10 month, etc.) it could be a sign that further weakness is ahead. Also, tracking a stocks relative strength or performance over a longer time period is also useful for determining if the market has concerns about a company.

No method is fool-proof and this month's list has two Chinese firms, Fuwei Films (FFHL) and China Techfaith Wirelss (CNTF). The screen is mechanical, so these two companies automatically appeared on this month's list. FFHL has been highly volatile in recent months. While its 52-week price performance is solid, it is below its 200 day and 50 day moving averages. Its one month performance is -42.64% (CNTF is down over 37% for the month). Clearly the stock is struggling despite its 52 week performance. The company was in danger of being delisted this spring due to ownership issues related to three of its major shareholders who were convicted in China of fraud related to the company's 2006 IPO (full story here). However, the company announced on May 19th that it regained compliance with Nasdaq after the ownership of the shares were transferred to a third party.

No official news by the company in the past month can account for the significant share decline. However, the entire Chinese small-cap sector has struggled as new accounting issues in the sector are revealed. The company is facing anti-dumping duties imposed by the US Department of Commerce but this was public news several months ago. With all this being said, it is safe to say FFHL is not without its significant risks despite its apparent low valuation.

Are all Chinese stocks fraudulent? No. But clearly there are significant issues in the sector and more companies could prove to be operating under false pretenses. The issue right now is trust - nobody wants to put their money in a sector where what you see may not be what you actually get. Investors of companies that make it through the increased scrutiny unscathed could be richly rewarded if they enter at depressed levels; however, substantial risk still abounds in the sector due to a lack of trust and transparency. For now, the simplest indicator of trust for a sector in which there is no trust is to follow each stock's trend. Despite the strong 52 week performance, the short-term trend in FFHL and CNTF are screaming sell, especially for moderate to conservative investors.

Ticker	Name	Market Update 6/21	Rank	MktCap	Pr2 SalesTTM	Pr2 BookQ	Pr 52W%Chg
GFN	General Finance Corporation	Here	98.5	65.82	0.38	0.6	164.59
FFHL	Fuwei Films (Holdings) Co., L	Here	97.95	29.9	0.33	0.34	143.62
ABL	American Biltrite Inc.	Here	94.96	29.29	0.14	0.57	93.85
APWC	Asia Pacific Wire & Cable	Here	94.21	67.08	0.14	0.43	85.11
PARL	Parlux Fragrances, Inc.	Here	92.18	64.14	0.52	0.63	71.67
KSP*	K-Sea Transportation Partners	Here	88.26	156.35	0.59	0.72	55.13
TGX	Theragenics Corporation	Here	87.21	63.71	0.78	0.79	51.61
MDH	MHI Hospitality Corporation	Here	83.37	29.05	0.37	0.76	42.92
COBR	Cobra Electronics Corporation	Here	81.52	22.17	0.2	0.64	39.51
CNTF	China Techfaith Wireless Comm	Here	73.95	186.86	0.65	0.67	30.26