Bad Things Happen to Good Businesses

Just like most things in life, businesses go through cycles. It’s not just the business cycle as represented by the general economy; every business experiences good and tough times no matter what’s happening in the rest of the world.

Right now there are some good businesses that trade on stock exchanges that are very attractively priced. Sometimes, things just happen to a company and the investing marketplace overplays the reaction. This is exactly the kind of situation you want to find if you’re an equity speculator who wants to buy low and sell high.

One such business that fits this description is China Sky One Medical Inc. (NASDAQ/CSKI), which, up until the beginning of this year, was a powerhouse wealth creator for shareholders.

This business is a Nevada-registered holding company that owns a portfolio of pharmaceutical companies in China. Still small, China Sky One Medical wants to become a leader in the sale and distribution of over-the-counter pharmaceutical products in that country. The company’s business plan is to grow organically and by acquisition.

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If you are a follower of U.S.-listed Chinese stocks, you’ll know that most of them are trading in the doldrums. The entire sector is off the radar of most speculative investors and, accordingly, offers some excellent value for your investing dollar.

China Sky One Medical did incredibly well on the stock market in 2010. Then, the company’s growth didn’t quite meet consensus estimates. The business was still growing, just not up to what analysts were expecting. Combine this with deteriorating investor sentiment for these kinds of shares and the stock price has experienced a terrible year so far. From a high of just over $25.00 a share set in January, the stock drifted lower to about the $10.00-per-share range and consolidated.

Recently, China Sky One Medical announced that a few of its private distributors had terminated their business relationship with the company, because they didn’t want their business information disclosed in SEC public filings, which it is required to report. Accordingly, the company reduced its 2010 revenue guidance to between 128 million dollars and 136 million dollars, down from 160 million dollars to 164 million dollars. The 2010 adjusted net income guidance was similarly reduced to between 26.0 million dollars and 31.0 million dollars, down from the previous 40.0 million dollars to 41.0 million dollars. And, at the same time, the company announced that its CFO had resigned due to health reasons. Here is a perfect storm for a business that is otherwise doing well.

After the company disclosed the revised guidance, the stock dropped to a new 52-week low of $6.25 per share. It has since recovered to its current level of around $6.75 per share.

Here is a growing company whose stock price just hit a 52-week low. China Sky One Medical just experienced a hiccup in its operations that was beyond its control, and fully expects continued growth in revenue and earnings over the coming years. The company has about half of its current stock price in cash in the bank and sentiment for U.S.-listed Chinese stocks is weak.

Call it poor management or just plain bad luck. With a situation like this, I can’t think of a better value opportunity to examine further.