CGYV: Reason for the Rally No Longer a Mystery

In Tuesday's unscheduled newsletter I mentioned it looked like somebody knew something about China Energy Recovery ...something that the rest of the market didn't know yet. There was just too much of a gain on too much volume to chalk up to coincidence. Well, I think today's announcement may have been what was causing the stir. 

First things first though... 
 

Reading the Tape

In Tuesday's discussion I examined all the reasons why I thought that day's volume/price action was institutional-level interest. The stock gained 25% on more than six times the normal daily volume.... out of nowhere, and in only a few block trades. Retail investors usually can't make that happen, but somebody big (or a whole lotta' small somebodies) can. And when they do, it's almost always a coat-tail you want to latch onto. 

More importantly, I suggested all of you do just that before CGYV got any hotter. See, once these big players start to wade into the waters, they tend to do it in stages.... and attract other big players too. In a perfect world it would start a feeding frenzy, and any shareholders would be along for the bullish ride.

Not that one more good day is the pinnacle of success, but for those of you who jumped in on Wednesday morning at the opening price of $1.37, you ended the day with a gain of 37.9%... the stock closed at $1.89. Not bad for a day's work.

Honestly though, I'm once again far more interested in the volume than I am the gain. Wednesday's volume of 319,000 shares wasn't as impressive as Tuesday's 494,000 shares, but those are by far the two best volume days ever for the stock. And, both of them were bullish.

The high volume affirms my suspicion about growing institutional ownership in this issue. It's the kind of thing retail investors want to see in stocks they already own. Why? Because accumulation (and the accompanying upside pressure) can last a while.

Anyway, I said I figured there was a reason for the run-up. Here's the likely reason...
 

More Dollars On The Way

In a nutshell, China Energy Recovery (OTCBB: CGYV) has signed an $11.6 million contract that will go on 2009's books. If my math is right, that brings the total business lined up for next year up to about $19 million... and we haven't even started the year yet.

Just for perspective, the company is on pace to do $26 million by the end of calendar 2008, which is more than twice as strong as 2007's $11.8 million total. And they've already got $19 million worth of contracts for '09 on tap? There's no telling what they'll actually have done by the end of '09.

Obviously the growth here has been enormous. In fact, we've seen a lot of it firsthand. Since we started watching the company in September, China Energy Recovery (or CER) has been awarded around $4 million worth of business. Well, actually make that a little less than $16 million worth of business, after today's announcement.

This particular contract is for an installation at one of China's top paper manufacturers - Shandong Tralin Group, or "Tralin".

Remember the pollution management system they built for Zhuji Paper Mill back in mid-October? The equipment could capture and reuse steam like all of CER's systems can. However, this hardware also captured the toxic by-product created in the process of manufacturing paper. The Zhuji installation can process/dispose of 160 tons of the toxic alkali (just called 'black liquor').

The Tralin installation will be bigger. It will be able to dispose of, or recycle, 195 tons of alkali per day in addition to generating 12 MW of heat energy. The heat will be used to create 145 tons of steam per hour, which means Tralin won't have to outsource much of their steam power production.

More impressive is the fact that the Tralin installation will be the biggest of its kind in the world. That's not a bad feather to put in your cap if you're looking to grow your business. 

A couple of brief thoughts on the news ....these contracts seem to be getting bigger, and the customers seem to be of higher and higher caliber. I can't help but get the feeling that the more business they win, the more they'll be able to attract in the future - a snowball effect fueled by constantly-improving stature. 
 

So What's the Real Reason For the Interest?

I mentioned in Tuesday, but I think it bears repeating now .....I think the market is finally waking up to China Energy Recovery. The value has always been there; it's just that somebody big had to recognize it to get the ball rolling.

To be clear, I don't think it was the Tralin news alone that prompted this new-found interest. I think it was the steady stream of announcements just like the Tralin news that got the market's attention. Clearly any recession hasn't affected CER's ability to garner business. And, with the company's recent swing to profit, what's not to like? 

Will the 'official' announcement spur round three of buying on Thursday? Maybe, though I don't know for sure. 

There's an old Wall Street adage ...."Buy the rumor. Sell the news." After gaining 73% in just two days, I can see some profit-taking on the horizon in the shadow of the Tralin announcement. So, don't be too shocked if it looks like CGYV is losing ground today. 

More importantly, don't worry about any mild selling - I suspect the sellers won't outnumber the buyers when it's all said and done. If volume is light on any pullback, we'll know it was a minority opinion. Who knows? Maybe Tuesday's and Wednesday's buyers will scoop up any shares a profit-taker is willing to sell. Volume is the big clue though, so look for my comments in the blog as this plays out.

Bottom line - I think CGYV has finally been 'found' by the right people who can put it on the map. It took a while, but I really think the company is coming into its own. I suggest using any dip as an entry opportunity before any more institutions start to jump in.