CNEH Update

I last posted about CNEH here. I was expecting a sharp Wave2 decline, but instead (perhaps for the better), the stock has experienced a shallow and choppy correction. I think CNEH is a very good buy in the $3.75-4.10 range, with a stop below $3.35. Once this correction ends, price could increase sharply as Wave3 commences. In Elliot Wave theory, Wave3 is the usually the strongest wave in the trend. My target for CNEH is above $7.50 over the next 6 months.

Here's a brief background of CNEH's fundamental strength. The company's business model is simple: it drills oil from a field with 25mil barrels of accessible reserves and sells it to PetroChina at the spot oil price for the 1st day of each month. It reinvests the cashflow from oil sales into drilling new wells to produce more oil. In Q208, CNEH had 192 wells that produced 135K barrels of oil. The company's plan is to build 650 wells in total. Before oil prices exploded, CNEH's balance sheet was weak, as its current ratio was poor. At the time, to help finance its liabilities and its well drilling plan, it negotiated a $15m loan with an investment fund. Now CNEH has a good amount of cash, and is executing its drilling plan easily. The financial upshot of all this is that in 8 days, CNEH's TTM EPS will be roughly $.56. By the end of 2008, CNEH should earn about $.90, and will be growing at 50%+.

CNEH's historical P/E ratio has ranged from as low as 6.5 to as high as 47. More recently, it has ranged between 9.5 and 20. When earnings are released, CNEH's lowest estimated share price would be 6.5 * $.56 = $3.64. At an average P/E of 10-12, CNEH should be trading at $5.60-$6.72, and $9.00-10.00 by year end. However, CNEH is applying to graduate from the OTCBB to the NASDAQ/AMEX. On such an exchange, it will be exposed to more investors, and will be valued more appropriately to its growth. A P/E of 15-20 would probably not be unreasonable for a company growing as rapidly as CNEH. Therefore based on fundamentals alone, buying around $4 or so would have a potential downside of $.40-.50, but a much greater potential upside.

The technical picture is also promising. According to Elliot wave theory, trending moves occur in 5-waves while countertrend reactions occur in 3-waves. This is what happened with CNEH, as there was a 5-wave rally from $1.61-->$5.68, and a 3-wave correction from $5.68-->$4.03 (see chart). Since Elliot waves are fractal, the rally from $1.61 to $5.68 is Wave1 in a larger uptrend and the decline to $4.03 (or lower) is Wave2. Volume has been drying up in this Wave2 correction, indicative of decelerating selling pressure. Once Wave2 finishes, Wave3 will start, and this is often the strongest wave in the trend (as mentioned above).

My stop is below $3.35 because there are several layers of support in the $3.50-$3.65 zone:

  • $3.64: P/E of 6.5 with $.56 ttm EPS

  • $3.62: 50% fibonacci retracement of the rally from $1.61-->$5.68

  • $3.50: long-term support/resistance line

  • $3.48: Wave-iv low

Thus, if price broke below all of this support, it would indicate that something has fundamentally changed with the company, and I would no longer want to hold its stock.

One last interesting point is that CNEH has likely fallen due to the intense selling pressure on energy stocks over the past few weeks. However, while big name energy companies like Chesapeake (CHK) or Cimarex (XEC) have fallen 35-40% on high volume, CNEH has fallen only 30% on decreasing volume. One would expect a micro-cap growth stock to respond more strongly to the intense weakness in the energy sector. However, it appears that its fundamental strength is supporting the share price, and bodes well for the future.

1 comment:

Make Money Blogging with Blogging to the Bank 2.0 said...

Aren't you guys glad that I pointed this stock out to you a year or so ago? Of course, I didn't base my recommendation on any sort of research and analysis like you have been doing since then, but I am sure glad you are doing such an analysis, and I congratulate you for the quality of this analysis. How do you drive traffic to this excellent blog? We might see some even more dramatic moves in this stock's price if more people read this blog and invest in CNEH. I was wondering also if you plan to analyse any other stocks e.g. some of these nanotechnology stocks?