ADY

American Dairy (ADY) has hit the skids recently so it is time to assess our position and try to see where the stock is headed. I still have a small stock position in my investment account with shares dating back as far as my original purchase in July of '08 at a cost of $7.08/share. These shares were free as the stock quadrupled I sold most in stages along the way to lock in gains and kept a small position as a trophy and to try and keep abreast of the stock with annual reports in case I begin considering a position again. This, in addition to my analysis of the stock in its current state, should help give us a good gauge on how to go forward with this one.

My most recent re-position in ADY with my options trading account has me into 100 share at a total cost of $11.35/share and an ITM put option at $12.50. With the stock breaking it's 52 week low (closing as low as $7.69) nearly everyday it's time to decide if I should "double down" or cut my losses. My original position 2 years ago committed me to the stock only about 7% lower than where we are currently at and I believed that was a great bargain at the time so let's look at what state the company is in today as compared to then.

In 2008 ADY was coming off a tough year with EPS down quite similar to what they are in now. Price to book was about 2 for the year also similar to now. Gross profit is double what it was then and I believe the total year earnings will continue to the positive side as the people owning a majority of the shares also run the company and therefore have a vested interest in see the share price recover.

If we adjust for the Milk scare that happened in China that significantly affected ADY's revenues and earnings positively they have made a nice steady increase in revenue over the years and it looks like they are setting up for that to continue. The negative earnings report this past quarter was all due to increased expense or more specifically spending on further increasing capacity, quality, and advertising. One third of the increase was basically marketing so they are obviously trying hard to build demand since they upgraded capacity in 2009. Their raw milk costs also increased due to their maintaining quality as they made big money for having high quality product when all the others had tainted milk before in the last scare.

Bottom line is I don't foresee the negative earnings to continue through the year let alone the next quarter. Estimates are -.04, but I am betting on a positive number by next quarter. I am looking to double down at this point ahead of the next Q EPS report and if it comes back positive as I expect then I will add to the position again. If it reports negative again then I might start considering an exit at that time.