DGW (Long)...

I'm liking DGW. They did their IPO a couple months ago and reported earnings a couple weeks ago. They reported earnings at $0.87 per share in their first quarter as a public company. DGW is a China-based company who manufacturers water treatment equipment. It's not sexy, but sexy is optional here. DGW has over 80 products across three main product lines, namely Circulating Water Treatment, Water Purification, and Wastewater Treatment. They also serve a broad array of customers. DGW, by all appearances, is a fully-integrated water company that is poised for tremendous growth in a market that surely needs to expand its infrastructure. We do need to tread carefully because this is a Chinese company and their accounting standards are much...shall I say...looser...than those we have in the USA.

The balance sheet looks very healthy to me, as they have nearly $11 in total assets for every $1 in total liabilities. Of their ~$188M in total assets, ~$137M of that is cash, so I like what I see there, too. They have ~$17M in total liabilities.

DGW is showing solid revenue growth, as well. 09Q2 was the largest quarter of revenue I have seen out of them, coming in over $31M. If DGW can keep up this kind of revenue growth, I see no reason they couldn't do $100M in revenue for 2009. They showed solid revenue growth across all three product lines

A yellow flag I saw this quarter was that the operating income was actually in the red by ~$300k. This is troubling considering the record revenues they hit, but it can apparently be attributed to a balloon in sales/general/administrative expenses. Their cost of revenue was more or less on par with their previous quarters, ~50% of the revenue generated, but the SGA expenses were way higher. SGA seems to typically run ~10%-20% of revenue, but in 09Q2 it ran at ~50% of revenue. This could be a one-time thing associated with their IPO, but it would take another quarterly release to tell us for sure.

DGW isn't due to report again for another couple months. Aside from that yellow flag in SGA, they had a stellar report.

Now let's go to the chart. As you can see, DGW debuted a couple months ago and has been off to the races ever since. The stock's doubled from its offer price already and has had a pretty decent pullback recently, but it appears to have held support at the middle BB. The increase in volume on Friday's pullback test of the middle BB is a bit disconcerting, another yellow flag, but the bulls were able to hold support and close of the lows of the day.

I am looking to buy a little of this one for a starter position, but will set my stop below Friday's lows. If that fails to hold, the next level of support is clear back at $26, which is the initial breakout level from the first few days of action, but also the lower BB.



Position: none