Author: Sreeni Meka
Model: Long Term Value
Disclosure: Long CNIT, MNRO
Last Month, a tsunami hit Japan and took a toll on Japan and its economy. The death toll was in the thousands and caused enormous destruction to the nation’s daily life and its infrastructure. The unexpected Black Swan event jolted Japanese and global markets, including the U.S. market. Fortunately, most of the markets including ours bounced back after the initial knee-jerk reaction. Hopefully, technologically advanced Japan will rebound with vengeance.
Some of the equities in my portfolio, including Korean POSCO, went up during the catastrophic event. It’s probable that investors were considering POSCO as the nearest supplier for the future Japanese massive reconstruction work. Despite numerous global events, including Libyan civil war, much of the market stayed stable, as did my portfolio. Irrespective of market panic events, I did not make any strategic shift to my portfolio. All my trading activity in the past three months was purchasing equities.
Last month, I purchased China Information Technology (NASDAQ: CNIT) after the earnings announcement. I did not time my purchase with this announcement, since I estimated the stock was already trading way below its intrinsic value. Right after my purchase it went down even further, and I think it’s now trading at even cheaper multiples. As Ben Graham famously said (I’m paraphrasing), the stock market is a voting machine in the short term and a weighing machine in the long term. The market sooner or later recognizes the value of a firm, as market participants digest earnings and margins.
As of 4/1/11, CNIT is trading at a trailing P/E of less than 4, and at 0.6 times book value (Yahoo Finance). China Information Technology is based out of Shenzhen, China, employs 1500 people, and is a provider of global positioning, security and hospital technology solutions. Most of their customers are Chinese public sector entities like public security, police, fire, hospitals and border security agencies. CNIT is a first mover and niche player in its market segment, maintains market leadership and has little or no competition in many areas where they serve.
Apart from margins, the growth trend at CNIT seems phenomenal. By all measures, CNIT appears to me to be trading at a very low price relative to its intrinsic value. The risks to my assumptions include market perception of Chinese stocks, Chinese inflationary concerns, Chinese government intervention with free enterprises and restrictions on currency trading by the Chinese government.
I will discuss my other recent purchases including Monro Muffler and Brake, Inc (NASDAQ: MNRO) in my next update. As I mentioned in my previous update, I strive to do my best in preserving and growing the capital in my portfolio and also mind you past performance is not guaranteed in the future.
