It is very hard to find under valued stock nowadays but I came across a stock 
that I believe under valued based on its financial statements. The company I mentioned was CHINA SKY ONE MEDICL (CSKI). I found its business is simple and its operation and its book are very easy to understand not like those banks you don’t know what is true and what is not. I brought 200 shares of this stock today at $15 something and I am planning to hold it for a while. I sold my Fortress Investment holding at $5 today. I made about $350 on that stock.
As I mentioned I like CSKI because its business is simple and easy to understand. It produces and sells over-the-counter drugs in China. I went to its web site. It has a portfolio of over-the-counter drugs. So its sales are not relying on a single drugs and it has a pretty stable sales trend. More importantly it has a very healthy cash flow. It makes profit for the past four quarters and its trailing 12 month P/E was lower than 8. Forward P/E is a bit more than 6. Price to cash flow is less then 10. Net income grow was more than 30% for the past three years. I don’t think I can find a second company like this. It was under valued by all measure.
If you are reading this post I hope you can take a look at it and post what you think about it. Are you able to find any company comparable to this one? I am thinking about all in again. By the way I bought 500 shares Dry Ship again at $6.45 a couple days ago. Planning to hold it for a while too.
I don’t feel like to post my trades until I break my losing streak. I guess that is understandable. The more I want to guess bank earning right the more I want to understand what all the financial terms means. I almost read through Wells Fargo’s first quarter financial report. Wells Fargo Earns Record $3.05 Billion, $0.56 EPS. I found it was daunting to understand all the information there as I didn’t remember the meanings of all the financial terms in the report. So I am going to understand it bit by bit and understand it a few terms at a time.
TCE Ratio
It stands for Tangible common equity ratio. It equals total tangible common equity divided by total tangible assets.
Tangible Common Equity
Tangible common equity is the amount of tangible asset that common shareholders would receive if the company were closed. So it doesn’t include intangible asset
Intangible Asset
Assets that do not have a definite existence are called intangible assets. They have neither a physical form nor give their owner definite financial rights. Deferred tax assets, good will, patents and copyrights and capitalized R & D, trade names and franchises are intangible assets.
Intangible Asset
Assets that have a physical existence, or give the holders definite set of financial rights. Land, machinery, bank deposits and investments security are tangible assets.
Tier 1 Capital Ratio
The Tier 1 capital ratio is the ratio of a bank’s core equity capital to its total risk-weighted assets (Source: Wikipedia). Risk-weighted assets are the total of all assets held by the bank which are weighted for credit risk according to a formula determined by the Regulator. Assets like cash and coins usually have zero risk weight, while debentures (also called note or unsecured corporate bond) might have a risk weight of 100%. Core equity capital consists primarily common stock and retained earnings. Tier 1 capital ratio is seen as a metric of a bank’s ability to sustain future losses.
I don’t know what is deferred tax asset but it shouldn’t affect me to understand Wells Fargo’s financial report
I read many articles that talk about loan loss reserve, loan loss provision and net chargeoffs. I don’t really understand what they mean and all of a sudden I want to spend sometime to dig into their meanings. One thing I am clear is that loan loss provision, is like cost of good sold on income statement, should be subtracted from revenue to calculate net income. I did some research and find the following from A Loan Loss Reserve Primer: Beyond Simplistic Ratios
The loan loss reserve (or allowance for loan losses) is a contra-asset account on a bank’s balance sheet that is netted against gross loans. Each quarter the loan loss reserve rises by the amount of the loan loss provision (an expense item;) and reduced by the level of net chargeoffs.
I still remember this general accounting principle: Asset = Liability + Owner’s Equity. So loan loss reserve can be viewed as negative asset sitting on the asset side. The increase of loan loss reserve will decrease the total asset value. And this loss of asset value is reported on income statement as loan loss provision. Loan loss reserve on the balance sheet is similar to the stocks a company holds. Its value can fluctuate from time to time. But the stocks a company holds is normal asset type and the increase of stock price creates a gain item on income statement whereas the decrease of stock price creates a loss item on income statement. Loan loss preserve may go down and when it happen it will create negative loan loss provision and bring up net profit. It can happen when the management decides that they are over reserved for loan loss. It was the number 4 arguing point of the quote in this post The Reasoning Behind Bank of America’s Upgrade. I think he really means BOA has over 100 billion loan loss reserve(not provision) and at some point in the future when the economic turns around Bank of America may find it is over reserved. We can see loan loss preserve is a pretty flexible item where every banks can make its own decision to increase it or decrease it base on its own view on its own loan portfolio although some general guidelines apply
Net chargeoffs are loan amounts considered absolutely not collectible. It shouldn’t change the total value of asset as far as my understanding. People can look at net chargeoffs to evaluate whether loan loss is over or under reserved.
At today’s closing price Bank of America June 12 put and US Bank June 17.50 Put should expire without value. That means I should’ve collected the proceeds in full on selling the puts. The total was $890. But my account still show these put worth $70. I guess I have to wait till Monday for them to be cleared out.
 Put Option Positions |
As you know I started trading options just a couple weeks ago and I realize selling put options is a fantastic way to earn higher then CD rates return without taking too much risk. I want to explain it in more detail for those readers who never trade options before. A put option is the right to sell certain number of shares of stock at a fixed price on or before the option expiration day. For example if you buy 1 contract of USB July 16 Option you will have the right to sell 100 shares of US Bank stock at $16 a share on or before July 18th. Right now USB July 16 Option premium is $0.35 per share. So if you buy 1 contract you will have to pay $35. Instead of being a buyer of put option you can act as the seller. In that case you will be paid $35 per contract and at the same you will give the buyer the right to sell you 100 shares of US Bank stock at $16 a share on or before the 18th of next month.
By 18th next month if the buyer does not exercise the contract the $35 is yours. The only situation that the buyer wants to exercise the option contract is when US Bank stock is traded below $16 a share on or before July 18th. In that case the buyer of the put option can buy 100 shares of US Bank stock in open market and sell them to you at $16 to make a profit. Take a look at what is price of US Bank stock currently. It is closed today at about $17.90. So the question is will US Bank stock price drop below $16 on or before July 18th. Do you feel comfortable to own US Bank stock at $16 a share? If your answers to the two questions correspondingly are “Not likely” and “Yes I feel comfortable” then I believe it is better for you to sell put option then let your money sitting in CD.
Let’s look at the return and risk. If you sell 1 contract of USB July 16 put and US Bank stock dropped to $15 a share you will have to pay $16 X 100 = $1,600 and end up with holding 100 shares of US Bank stock. Your lost will be $1,600 + $35 – $1,500 = $65. So you will probably want to keep $1,600 cash ready to pay for the shares. If US Bank stock stays above $16 you will get $35. So the return is $35 / $1,600 X 12 = 26%. What is CD rate right now? I think 3% is the best you can find in this market. Of course 26% of return is not come out of free. You will take the risk of losing money if US Bank stock drops below $16 whereas CD guarantees your return. Ok if that is too much risk for you then you can use options with a lower strike price say $15. The premium is 0.15 right now. So you can earn $15 instead of $35 per contract. That is $15 / $1,600 X 12 = 11.25%. Frankly I think if you can get USB at $15 by July 18th you are very lucky. I am bullish on US Bank and believe it will not drop to $15 even the market have a correction.
So that is how it works and don’t forget there are transaction fees involve in trading options. Right now my account have about $30,000 if I don’t want to risk my money doing day trading I can sell put and I feel comfortably it can really make me better than CD rates of return. Anyway selling put options works for me put owning PCX (Patriot Coal) is a pain for me I don’t know when I can get rid of it. If it were not for PCX I should have come back above my original capital of 30,000. Right now my account balance stands at $29,537.36 and it is up $320.00 today
Account Balance Changes: +$320
