Market Buzz

Market Buzz – Cash Rich Zungui Beats 2010 Earnings Expectations

The U.S. dollar weakness theme continued this Friday despite an initial drop in the Canadian dollar vs. the Greenback after a report showing that Canada’s economy unexpectedly shed 6,600 jobs in
September. The initial weakness subsided and U.S. dollar weakness mounted as investors digested a report that U.S. employers cut 95,000 jobs during the month.

The U.S. losses, which compared with expectations that payrolls would remain unchanged, spurred speculation that the U.S. Federal Reserve would turn to quantitative easing to stimulate the economy, which would further reduce the yield on U.S. debt.

On Friday, strength in fertilizer and gold propelled the S&P TSX Composite up 1.4 per cent on the week. Toronto’s benchmark index is now up over 13 per cent from the early July lows, in a rally that has caught investors off guard heading into what looked to be a dicey fall season.

Switching gears to our Canadian Small-Cap Coverage Universe (www.keystocks.com), we take a brief look at the strong results from Zungui Haixi Corp. (ZUN:TSX-V) issued this past week. Zungui is principally engaged in the manufacture and sale of athletic footwear, apparel/accessories (Sportswear Product Line), and casual leather footwear (Casual Product Line). Both product lines are marketed in the Peoples Republic of China (PRC) under the well-recognized ZUNGUI brand.

For the year ended June 30, 2010, total revenue increased 18 per cent to $163.9 million from $138.7 million in 2009. In RMB (Chinese currency), revenue increased 30 per cent to RMB 1,061.3 million for the year compared to RMB 815.6 million last year. Net income increased 17 per cent to $27.0 million, or $0.43 per share fully diluted.

We were very impressed with Zungui’s quarterly and year-end results, which beat expectations. In particular, cash flow surged to $30.3 million, or $0.49 per share, compared to $17.4 million for the prior year. The company now has $85.9 million, or $1.38 per share, in cash in the bank with no debt.

Looniversity – What Is a Company Worth?

A common misconception amongst novice investors is to equate the value of a company directly to its stock price. This might sound counter-intuitive, but it’s incorrect to think that a company trading at $50 is worth less than another trading at $100.

What a company is actually worth (its value) is its market capitalization. Market cap (as it is commonly referred to) is the stock price multiplied by the number of shares outstanding (the total number of shares a company has). For example, a company that trades at $100 per share and has 1,000,000 shares outstanding has a lesser value than a company that trades at $50 but has 5,000,000 shares outstanding ($100 x 1,000,000 = $100,000,000 while $50 x 5,000,000 = $250,000,000). Market capitalization changes every day when the price of a stock moves up and down. It will also change if a company issues new shares or buys back shares from the public.

Let’s take a look at an example from reality. The current price of Microsoft’s stock is $29.38 and its market cap is $273.62 billion; IBM’s stock price is currently trading substantially higher at $124.29, but the company is worth less overall since its market cap is $170.70 billion. This means that even though IBM’s stock is higher, investors feel that the value of Microsoft, as a whole, is about 60 per cent greater than the value of IBM.

The bottom line is – don’t equate a company’s value with the stock price

Put it to Us?

Q. Although I have yet to invest in the markets, watching stocks over the past three years has left me with an uneasy feeling. Is it finally a good time to start investing in stocks?

– E. Richard; Edmonton, Alberta.

A. Timing the market or trying to find the perfect entry point is often a fool’s game. In fact, in your case, we suggest you begin by first evaluating whether or not purchasing individual stocks is the right decision for you.
Empirical studies have shown that over the long term (ten years or greater), equities or common stock vastly outperformed all other investment tools including bonds, term deposits, and preferred shares. As a result, for the majority of the investing public, long-term exposure to common stocks through individual companies, mutual funds, or index-based investments is usually a good idea.
Having said this, your decision must take into account your individual risk profile and ultimately allow you to sleep soundly at night. If, even after you are told that investing is a long-term practice, you find that you cannot put aside the daily fluctuations, then maybe common stocks are not for you.

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