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China Education Makes All Time High While Universal Travel Swoons
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December 13, 2009
Volume X, Issue 113


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To OTC Journal Members:
China Education Makes All Time High While Universal Travel Swoons



On Friday China reported a pretty major surge in both imports and industrial production, suggesting the Chinese economy is booming as rumor has it. November imports in China rose 26.7% from November of '08. Industrial production surged 19.2%- the fastest pace in over two years for China.

I read an article in the Wall Street Journal suggesting China has a new problem- inflation. Wasn't it just a few months ago the "analysts" were arguing the Chinese stimulus package wasn't working! Then, there's the other geniuses that claim China cooks the books. If you thinks that the case, just visit.

Hence, the old adage Wall Street Climbs a Wall Of Worry. We go straight from ice cold to overheated. Recession to inflation in the bat of an eye. Isn't there ever a time that there's simply good reasons to invest? Yes- now. When you read about all the challenges in China, just think of the US in 1960 with 28 times as many people and a lot more resources. Then think about where you'd be if you had invested in the great growth companies of the next 40 years.

Here's a couple of quick updates before we get into next week.
China Education Alliance (NYSE AMEX: CEU) Makes New All Time High; For A Day



China Education, the Rosetta Stone of Northern China, made a new all time high this past week as others are finally starting to take a hard look at their numbers and recognizing the undervalued nature of this idea.



This past week the company got some favorable ink from Motley Fool. Their article lived up to their name as they compared the company's corporate performance with that of Perficient, Real Networks, and eBay. Where these guys came up with those comparisons I have no idea. None of their businesses are even remotely akin to China Ed- China Ed provides standardized testing training for Grades 5 through 12, and Vocational Training for post High School students.

I project CEU will likely earn at least $1 per share over the next four quarters. Probably more. The company also has about $2 per share in cash and no debt of any kind. CEU made a net profit of $4 million on $10 million in revenues last quarter. Those are gigantic margins.

For those of you with a real understanding of financial performance, I have a special treat. I had a CFA (certified financial analyst) do an evaluation of this company's financial performance.

He projects this company is capable of delivering $130 million in revenues by 2014, and net profits of $35 million. He computes an intrinsic value today of $14.36 per share. It's complex, and if you're not an analyst a little tough to interpret. However, if you'd like to have a look at the spread sheet, simply click here.

This past week CEU did trade up to a new all time high as you can see from the chart. It was a brief two day blip, but nevertheless a new high. It has since fallen back. There are two challenges here. First, the company needs to do a more effective job of getting the word out on the company.

Probably the bigger challenge is the supply side on the stock. CEU engaged in a Registered Direct Offering of 3 million shares at $5.50 about 6 weeks ago. I have no idea why- the company did not need the $15 million. Small cap underwriter Rodman Renshaw generated some nice fees, but so far as been nothing but a blight on the technical side.

These Registered Direct Offerings seem to be technical death for these stocks right now. CEU is grinding through these shares and close to breaking out. The poster child for the toxic nature of these financings is my following: Xinhua Sports (NASDAQ: XSEL)- financed at $1.32- now $1.02.

CEU, of late, has been making a series of higher lows and higher highs. There's a bit of a low right now. Take advantage of it. This is my #1 idea, and you've seen how #2 (CREG) and #5 (TPI) are working out.

And, speaking of these Registered Directs, it's now killing another one of my ideas:
Universal Travel (NYSE: UTA): Kills Technical Picture



Universal Travel has a unique place in history. To my knowledge, this is the only company in history to make it from the Bulletin Board to the New York Stock Exchange in the same calendar year.



I recommended this stock at $8 back on June 7, and the stock has since been as high as $16.90. Friday, the stock closed at $9.07. This past week the company engaged in a Registered Direct Offering of 2.2 million shares at $9 per share- the company is raising $20 million to be used primarily for acquisitions.

Naturally, the stock traded straight down to $9, and no doubt will now take some time to grind through this dilutive financing. It's creating some nice investment banking fees, but no apparent short term benefit for existing shareholders.

I still believe this is likely a $20 stock at some point down the road. However, the stock will undoubtedly now struggle for some time. Probably a couple of months as the market absorbs this excess supply that has no doubt been billed to hot money traders.

UTA does average about 350,000 shares of daily volume, so it might not take the market too long to absorb this supply. What you do from here depends entirely on your investment objectives. If you are a traded longer for shorter term ideas, just sell this one and stay on the sidelines until the stock gets momentum again.

If you are a long term value investor, this pull back is a good opportunity to take advantage of some technical weakness in the stock. You make the call. It's your money.

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