I'm increasingly looking at small cap opportunities in this trendless market, dominated by herd behavior - much of it computer generated. The hope is we find some companies that are outside the radar and hence not so reliant on hundreds of hedge funds moving in or out of stock en masse for us to profit. Now, the negative with under covered small caps is they can sit... and sit... and sit... for a long time without any movement. And then suddenly surge out of the blue on a catalyst - much like Fuel Systems Solutions (FSYS) has done (Aug 7: Fuel Systems Solutions - Monster Quarter but Impairment Charge will Confuse). But this many times requires, months/quarters of no "benefit" (price appreciation) from holding the stock. And in a "what have you done for me" world with investors who always want appreciation, that's a tough road to hoe.

With that said ShengdaTech (SDTH) might be the right company at the right time with the right catalyst to wake up the market to yet another undervalued opportunity that is sitting in purgatory. First, let's look at the most important thing in this market - the chart.

As you can see the stock has had a rough year, dropping from $15 to as low as the $7s. In full disclosure I've been following this company for this entire period and was bullish on it in the $12-$13 range, thankfully we did not buy since we would of been bludgeoned but as time has passed the fundamental story has only improved, while the stock price has only broken down. Typical for this market. With that said we have built a nice 5 month base, mostly between $8 and $10. And that's pretty much all you need to know in today's day and age - the chart.

But since I am old school, I'll give you some background so you can see how people used to invest before computers took over the world. ShengdaTech (SDTH) has 2 business lines; moving into a related 3rd (more on the 3rd later) Per the company' website (note, very cool front page)

1. Nano Precipitated Calcium Carbonate (NPCC) - NPCC refers to ultra-fine precipitated calcium carbonate with an average particle diameter of less than 100 nanometers that is used as an additive in various products. Because of its special physical and chemical properties, NPCC has been widely applied in the paint, paper, plastic and rubber industries. We are targeting the fastest-growing area for NPCC, the tire and PVC building material market. It fills the spatial structure in rubber and enhances the property of rubber products. It can be used solely as a filler, which has a reinforcing effect, and it also can be applied with other fillers such as precipitated calcium carbonate, argil and titanium oxide for reinforcement, filling, improving the process and property of products and reducing rubber content. NPCC can be used to partially substitute some expensive materials such as titanium oxide and silicon dioxide. Currently, we are the only Chinese manufacturer of NPCC that is able to supply the tire market.
2. We are a leader in the coal-based chemical business in northern China, and manufacture ammonium bicarbonate, liquid ammonia, methanol and melamine. Ammonium bicarbonate and liquid ammonia are mainly used for nitrogenous fertilizers and raw materials of chemical products. Methanol is a chemical material and a clean alternative to fossil fuel. It is used in the chemical industry, pharmaceutical industry, light industry and textile industry. Melamine is the intermediate product of environmentally friendly resin.
   

Now on the basis of these 2 products lines, especially the NPCC this would an exciting enough of a company. But in the near term we have an important catalyst which could provide the only thing that seems to be moving these small cap Chinese stocks nowadays - a potential for a large earnings surprise. The company is acquiring a nitrogen fertilizer company.

• (June 20) Today announced that it plans to acquire Jinan Fertilizer Co., Ltd., a nitrogenous fertilizer company based in Jinan, the capital of Shandong Province. The Company intends to relocate its existing coal-based chemical operations to the facilities of the target acquisition, following receipt of a relocation notice for its factory in Tai'an City from the Tai'an City Government on June 16, 2008.
• The Tai'an City Government, as part of China's strengthening of environmental law enforcement reform, issued the relocation notice due to the close proximity of ShengdaTech's coal-based chemical facility to residential and business properties. According to terms of the relocation notice, ShengdaTech must cease operations at its Tai'an City coal-based chemical facility on November 1, 2008 but is permitted to continue operations until October 31, 2008 to ensure a stable transition of its chemical business and employees.
• The transaction will be contingent on the completion of an independent audit and due diligence, and negotiation of the final terms and a definitive agreement, and will be subject to approval by ShengdaTech's board of directors. The Company expects to complete the acquisition of Jinan Fertilizer Co., Ltd. on or before November 1, 2008.
• Jinan Fertilizer and its subsidiaries' were founded in 1958 as the first state-owned, mid-scale nitrogenous fertilizer enterprise in China. Jinan Fertilizer has seven subsidiaries and about 1,800 employees.