TPS Position Update – September 8, 2015

. . . . KINGOLD JEWELRY INC. (NASD: $KGJI) – Hold

The uncertainties roiling the Chinese markets have been rattling stock prices for months now, and Kingold has taken a nasty hit.

But this is not the time to sell.

There are two reasons why we are continuing to recommend a hold.  First is the fact that Kingold is actually making money.  It managed to turn in a profitable Q2 even though profits plunged.

Gross profit was $2.4 million, down $22.1 million, from the corresponding quarter in 2014.  Sales were down as well, along with the amount of gold Kingold processes into fine jewelry for the Chinese consumer market and gold for investment.

The combination of lower global gold prices and China’s economic turmoil has soured investors on Kingold.  What do we see that others don’t?

For starters, a gradual rebound in the price of gold.  Kingold was forced to take a $7.3 million write-down on the value of its inventory during Q2 because of lower gold prices.  

But more significantly is what we see ahead for China. The Chinese stock market has lost 40% since peaking in June, a healthy correction.

The government is trying to stimulate the economy, which hasn’t exactly ground to a halt… the annual growth rate is now at 4.6%.

This provides ample opportunity for Kingold sales to rebound.

Looking ahead, Kingold CEO Zhihong Jia says, “We believe market conditions will motivate us to enhance our design capabilities to solidify our position as one of our industry’s leaders, to establish new partner banks to further extend our coverage for our investment gold products, and to seek and explore new opportunities to expand our sales channels.”

This is a time to ride out the storm.  The stock has edged back up from August lows.  We anticipate trading above the $0.80 level by year’s end, as demand for gold in China regains lost steam. 

. . . . PENDRELL CORP. (NASD: $PCO) – Hold 

It’s been a year of contrasts for the Kirkland, WA firm that’s in the business of buying, holding, and selling technology patents.

Pendrell acquires tech companies with desirable intellectual property rights and manages IP (intellectual property) licensing programs.

During the first six months of 2015, Pendrell did not invest in any new patents.  It continues to hold roughly 1,200 patents in its portfolio.

We would like to see stronger financials. During the first two quarters of 2015, the value of Pendrell’s assets… including operating cash… is down.

Revenue is down, expenses are up, and the operating loss is growing.

But against this gloomy backdrop, the stock is doing well.  We recommended PCO in May at $1.02.  Now, it’s trading at $1.48.

Let’s follow a classic piece of Wall Street advice and let our winners run.

We still like the business model.  Pendrell’s diversification, and its investments in these 1,200 patents, is an ideal way for technology investors to be positioned to profit from patent and intellectual property rights windfalls. 

Action To Take

• Hold KINGOLD JEWELRY INC. (NASD: $KGJI)
• Hold PENDRELL CORP. (NASD: $PCO)

Category: TPS Update