Every now and then I like to give guest authors a chance to share their views either on the stocks that I already cover, or names that I don’t, but that I feel would benefit my readers. Some of these author’s viewpoints agree with mine, and some don’t.

I feel that the more information you have about a particular company, stock or the market in general, the better decisions you can make regarding your investments and what actions you should take in regards to those investments.

Today’s guest author is Glen Bradford, he runs his own blog, GlenBradford.com.

Glen is an MBA at Purdue University that’s investing his entire college tuition in the stock market.

He writes for seekingalpha.com and stockpickr.com and I like his approach to investing and feel that it gives us another angle when looking for new places to park our money.

Please note that this is not a formal recommendation, just an information piece designed to allow you access to companies that I might never cover, but that are worth a look for your portfolio.

Noodles Are So Incredibly Sexy

By Guest Columnist: Glen Bradford, GlenBradford.com

What would you do if I told you I have a company that is China’s 4th largest producer of instant noodles, flour-related products and soybean-derived products and is selling significantly under book value.

In fact, if you could get 10% of book value out of its non-cash assets and you decided to liquidate the company, you’d be breaking even if the company went out of business.

Historically, they’ve been filling orders for Buffett’s Coca-Cola and KFC.

Alright, have I got your attention? How about if I told you that right now, the 9-Day RSI is 0.137 and it’s selling at its 52-week low? Note, it is Sunday January 18th as I write this.

In other words, the company’s stock from a fundamental and from a technical analysis perspective are both setting up amazingly.

More good news?

According to the company: “Inventories are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Costs of work-in-progress and finished goods are composed of direct material, direct labor and an attributable portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose.”

What this means is that if I take ownership of the company, take the cash and pay all its debt, and then sell the inventories at book value and sit on the rest of the assets, I’ll be making over 100% return because I’d be sitting on $0.53 per share of profits and have paid $0.21 a share.

Not to mention, I’d have lots of factories to play paintball or king of the castle in.

The P/E Ratio is at about 2 and the price to book is a stunningly low 0.18.

The earnings growth hasn’t been good but there’s definitely upside potential.

In addition, there’s a lot more upside in China than there is in the US at this point and if you take the company’s lowest quarterly earnings and project it as a full year, the P/E is 2.626.

I can tell you’re probably sweating to find out the name of this company. You are starting to perspire and you’re probably hungry for some noodles.

Well, the company that I am speaking of is New Dragon Asia Corp. (NYSE: NWD).

So, if you’re asking me, why now? Why are noodles so sexy you say? Well, looking at the prices of wheat lately, we are a lot lower than we were 6 months ago. Note that in the company’s last quarterly report, they noted that their margins were down because wheat prices were up.

The company reported: “Gross profit was $2.5 million for the third quarter of 2008 compared to $2.8 million for the third quarter of 2007. The decrease in gross profit is attributable to the increase in the price of raw materials used in the Company’s products, principally wheat. Gross margin as a percentage of sales was 17% for the quarter.”

The good news is that if you use the historical gross margin of 0.21, you’re pulling a P/E ratio of about 1 at this point.

So, what I see is a company that has a fairly strong product in a highly competitive market, where they just got beat down because of higher raw materials prices due to global commodity speculation.

These margins should be expected to be back in balance, and yet, the price of the company is still on a wildly violent swing to $0.

New Dragon has no long term debt and their outlook over the next year demands net income growth unless there’s a one-time unforeseen item that occurs.

Just by the numbers, I’m expecting 100% net income growth in 2009.

That’s really bullish of me, but realistically, you’re still getting a bargain even if there isn’t any net income growth at all!

Notice that wheat prices spiked at the end of 2002 and what that did to NWD’s gross margin (in blue just above the trading volumes).

It looks like NWD buys futures 6 months in advance and has learned from this mistake because since 2002 their gross margin has stabilized.

That said, we are 6 months past the last spike, which was about 8x as big as the one in 2002. Worst case scenario, we could see up to 2 quarters of negative earnings growth on NWD, but the overall picture to me looks like we are in the middle of the worst with a huge upside and very limited downside from here.

Want More?

• Check out the latest quarterly report.
• Check out historical news highlights.
• Check out some good analysis done 2 years ago.

Disclaimer: Glen owns NWD

Today’s guest author is Glen Bradford, he runs his own blog, GlenBradford.com. Glen is an MBA at Purdue University that’s investing his entire college tuition in the stock market.

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