Betting on a Chinese High-Tech Champion

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

With global markets selling off sharply both Friday and this morning, this is a tough time to be making stock recommendations.

But this week’s Bull Market Alert pick, Spreadtrum Communications, Inc. (SPRD), the leading Chinese fabless semiconductor provider, is one of a handful of companies that has been bucking that negative trend. Spreadtrum develops the advanced technology and software design that drives the inner workings of many of China’s cell phones.
I first recommended Spreadtrum last year, and purchased it both personally and for my clients at my firm, Global Guru Capital. I continue to believe that Spreadtrum is destined for long-term success for a simple reason. As a leader in the strategic area of semiconductors, I believe that the company has been informally designated as one of China’s high-tech “national champions” by the Chinese authorities.
In the past, the company has benefited from government-brokered deals and favorable financing from China’s state banks — exploiting the unwritten rules behind business success in China. And much of Spreadtrum’s initial success has been due to the special relationship it has with China Mobile (CHL), China’s largest telecom operator. China has been providing China Mobile with low-end, subsidized TD-SCDMA standard chips for years. And it’s this “special relationship” that has allowed Spreadtrum to establish a leadership position in the 3G standard in the largest mobile market in the world.
Spreadtrum also has been steadily expanding its influence beyond China’s borders. The company has been supplying transceivers to Korean giant Samsung since 2009. And two weeks ago, Spreadtrum announced that its newest TD-SCDMA baseband chip, the SC8802G, is shipping in Samsung’s top-of-the-line GALAXY S II smartphone, targeting China Mobile subscribers.
Spreadtrum’s stock took a big hit earlier this year when short-selling investment firm Muddy Waters attacked the company for potential accounting irregularities. Muddy Waters had played a central role in unmasking similar shenanigans in other Chinese companies. But Spreadtrum’s management faced the challenge head-on. It organized a reassuring conference call with investors; announced a stock buyback; and it paid out a special dividend. On top of that, the company’s CEO and CFO bought $3.2 million of Spreadtrum’s stock on the open market.
Soon thereafter, Spreadtrum announced better than expected financial results. In Q2, revenue increased 16.9% quarter-over-quarter and 124.2% year-over-year to $160.2 million. That exceeded the company’s previously guided range of $152 million-$158 million. GAAP net income was $32.5 million, compared with $27.5 million in the previous quarter and $11.1 million in 2Q of 2010.
With the Muddy Waters-induced crisis abating, the stock has regained its footing, even in the face of the global sell-off since early August. And even after its recent run-up, Spreadtrum is trading at a price-to-earnings (P/E) ratio of less than 10 and a forward P/E of 8.3. That makes it one of the cheapest stocks in its sector.
So buy Spreadtrum (SPRD) at market today and place your stop at $14.50. If you want to play the options, I recommend the January 2012 $20 calls, SPRD120121C00020000.

Portfolio Update

ProShares Ultra Silver ETF (AGQ) came in flat for the week with a 0.13% loss. Both silver and gold are taking a little breather, readying for their next move. Silver peaked near $50/ounce back in May and has been steadily creeping back ever since. The bad news in Europe, coupled with the formation of a bottom in late August, bodes well for silver in the coming weeks. AGQ is a BUY.
Alliance Resource Partners L.P. (ARLP) fell 3.52% this past week. There is a mini-wave of coal company mergers and buyouts taking place right now. Such action tends to lift an entire sector and should benefit ARLP, as well. ARLP currently is testing its 200-day moving average. Combined with an $84.71 price target by analysts, the outlook is bullish for your position in coal. ARLP remains a HOLD for now.
Bank of Ireland (IRE) lost 5.79% during the past five trading days. A group of five large investment firms gained approval on Sept. 9 to acquire a 35% stake in Bank of Ireland for 1.123 billion euros. This same group of investors recently acquired a 10% stake in the bank. Investment by sophisticated investors is always a bullish sign. IRE is now a HOLD.
National Bank of Greece SA (NBG) declined 9.78% this week. Greece recently has come back into the global spotlight, and not in a good way. Heavy-hitters such as Germany’s Chancellor Angela Merkel are now beginning to utter the words “default” and “Greece” in the same sentence. This is putting pressure on our position in NBG. However, some investors see a Greek default as a true “bottom,” and a real chance at recovery. NBG is a HOLD for now.
ProShares Ultra Gold (UGL) gained 2.94%. Gold prices have been stabilizing in recent weeks after a very sharp move upwards. With global economic uncertainty at an all-time high and the European crisis back in the headlines, the story for gold remains intact. Our position in UGL puts us in a good place to profit from gold’s next move upwards. UGL is currently a BUY.

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