HYRF joining the $1,000,000

As you probably know already I bought a stock, EYII.OB, for the $1,000,000 adventure.

I bought EYII because it has a good product to sell and it received a letter of intent from a governmental Chinese corporation to buy $210M of that product, throughout 2006 and 2007.

EYII sells the product, but the producer of the product (a water filter) is another small company, HYRF.

HYRF has a market cap of just $6.39M, and EYII ordered, just for the months of August, September, October, November and December 2005, more than $7.5M in filters and pitchers (this was before the LOI from the Chinese).

I made some math. The order from EYII was for 72,000 filters a month, until the end of the year, which gives me 360,000 filters in total. HYRF says the value of the order is to exceed $7.5M, but lets consider $7.5M as the number. $7,500,000/360,000,000 = $21 is the price of each Code Blue filter.

I found out, listening to some product presentation from EYII, that they sell the filters for $70 each.

Of course, the Chinese will negotiate the price based on the extra-large amount of their order. And EYII will probably do the same to HYRF. Let's say the final price set for the deal is $50 and EYII pays HYRF $18 for the product (this can't be called an estimate, just speculating here).

$18/$50 = 36%. 36% of $210M will end up being revenue of HYRF (the producer), which totals $75.6M for the two years, 2006 and 2007 combined.

After all it doesn't seem HYRF has a lot more potential than EYII (usually the seller gets more money than the producer), but anyway the stock is undervalued at this point.

Technically the stock rose a lot on the news but fizzled almost completely, due to lack of liquidity and the need for a reasonable chart pattern I believe. Now, with a second leg down a technical bottom can be put in place, and certainly the fundamentals of the company deserve that. Insiders have been buying some stock, not much, but some, and that's always significant. A couple of months ago an institution bought a block of shares at price $0.27.

Considering all this today I'll buy $1,000 of HYRF for the 3 Pennies on Fire Portfolio, in connection with the $1,000,000 adventure.

(This recommendation was made by David Randolph from 3 Stocks on Fire. 3 Stocks on Fire is a Community of stock traders and investors. Our 2814 members change trading ideas and strategies on our message boards everyday. We welcome you as a new member of the 3 Stocks on Fire Community, please take 10 seconds to register and receive our free newsletter)

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