Monday, December 26, 2011
Cardero Resources (CDY): Bargain
I keep forgetting to update my purchase of AGQ (Silver Bull 2X ETF) on the open this past Monday morning at $46.72. Sorry about that.
My TSI Trading Record has been updated.
I anticipate purchasing shares of Cardero Resources (CDY) when post-Christmas NYSE trade resumes on Tuesday.
Mining stocks, as you are well aware, are very out of favor right now. Indeed, the $BPGDM (Bullish Percent Gold Miners Index) that is available for examination at www.stockcharts.com is at lows that should be close to a bottom. At present it is reading just 13.79 - which is the percentage of mining stocks in the index with BUY signals on their point and figure charts.
Unfortunately, it's entirely possible that miners have not finished their wash out process - particularly as gold itself may have a final leg down to conclude this weekly cycle.
So, with a bit of caution in mind I decided to look at miners that looked as though they were not likely to have much, if any, downside left. While looking at over 200 charts I rediscovered an old friend - a company I have followed for a couple years now, know something about and have traded very successfully in the past. And that company is Cardero Resources (CDY).
Cardero trades on the AMEX exchange. Of all the charts I looked at, Cardero is currently priced closer its 2008 low than any other mining company one could take seriously. Additionally, of all the mining stocks on the AMEX, CDY trades at the lowest price to book value ratio of any - an incredible 57% of book value. Now that is a discount if I ever saw one.
CDY has a small float of just 91M shares outstanding - this figure includes a recently closed private placement of $7.6M. And, the company has ZERO debt.
I'll offer some thoughts on 'why' Cardero is currently mispriced, but how about we take a look at some charts.
From a technical perspective CDY seems to have a few things going for it. First, what appears to be an inverted head & shoulders pattern on the daily chart suggests a minimum price move of 57% could be in the offing. Additionally, the TSI would not need much encouragement to render a Trend Line Break BUY signal with an additional ZERO crossover BUY signal presumably not too far away.
This is a longer term look at CDY and its weekly chart.
We can see that the 2008 bargain basement low was $0.73 and recently CDY traded as low as $0.74. However, when investors have turned their back on this stock for too long, sharp rallies can quickly carry the stock up to $2, $3 and even $5. That is explosive.
Last chart - a daily of the Market Vector Coal ETF (KOL).
Here the inverted head & shoulders pattern is a little clearer to see than in the CDY specimen. Curiously enough, it also projects a minimum price gain in excess of 50%.
Is there something wrong with the Cardero company, some bad news, to explain its current bargain price? NOPE.
There is a lot of background information that I am going to omit - I'm just not interested in spending 3 more hours reciting it all. If this stock interests you then by all means read all the SEC filings, commentary on Yahoo and Fool and tear through the company website (www.cardero.com).
Having done that for myself I conclude that the stock price is suppressed as it is in an extremely out of favor industry group - miners. On top of that, Cardero does not have a project that is already producing revenue. Further, the company, while having a major position in a coal mining operation, has it's financial resources spread out over several other smaller mining operations that include coal, but also iron, titanium, gold, silver, zinc. If that were not enough for analysts/investors to keep up with, CDY also owns stock in a couple of other mining companies (investments) that amounts to about 30% of their net worth. Add to that December tax loss selling and the plate is full of (temporary) negatives.
I believe that the investment community goes through periods where this company does not fit into some nice box and is periodically removed from their radar screens...... I believe that to be the case at the present time.
A couple of final observations. First, it is important to appreciate how Cardero got to where it is today. Seven years ago the company purchased the Pampa de Pongo iron ore deposit in Peru for $1M.
Six years later they sold it for $100M.
And secondly, their coal mine operation just released a preliminary economic assessment. The project contemplates a net after tax and expenses profit of $115M per year after mining begins.
Remember, CDY has ZERO debt, only 91M shares and sells at .57 Book Value.