Sleeping Giants: 3 Chinese Stocks to Buy
Tuesday, October 28, 2008 | Chris RoweRating:
The S&P 500 is about 44% off its October 2007 high.The Dow is about 40% off its October 2007 high.
The NASDAQ Composite is about 46% off its October 2007 high.
The market looks like it's even going lower!
Today I'll talk about a market that people seem to have forgotten about, or seem to be running away from for some reason.
When markets are skyrocketing, all savvy long-term investors can think about is what companies they would buy if the market were to take a huge nosedive. But when the market finally does show you stocks trading at a big discount, most investors forget all about their dreams of this once in a lifetime opportunity.
Don't forget, the reason stocks are getting hammered in the first place - to put it simply - is that everyone is bearish, selling and thinking about the current gloom and doom scenario. When the same people are confident, the market is overbought.
As I mentioned in last week's article, Warren Buffett is a big buyer of U.S. stocks. He has a 10-year outlook. But do you remember the huge economic explosion that everyone and their neighbor was dying to break into?
What ever happened to your love for Chinese stocks? What about the explosive growth potential?
After seeing the Shanghai Composite trade from 1,000 in mid-2005 to over 6,000 in late 2007, investors were licking their chops wishing the market would tank so they could buy into the companies that would benefit most from China's rapidly expanding domestic demand. The smartest investors in the world from Warren Buffet to Jim Rogers were talking about investors in China making fortunes overnight, the way immigrants to the U.S. did by getting in on the ground floor of the U.S. explosion.
500% gains in just two years are not uncommon scenarios for the Shanghai Composite. It was created in 1991 when it went from 100 to 250, and continued to 1,200 in 1992. Then after dropping to 400, it ran up to 1,600 within three months. The time-line continues with more of the same so as you can imagine it's been incredibly volatile. In the following 15 years, the Chinese stock market gave you numerous opportunities to make several thousand percentage points in profits...
Guess what folks - Here we go again! We've just seen the Shanghai Composite drop from 6,000 to 1,000 (losing 70%) and, of course, it can drop further (awesome!)
The question is, when you decide to stake your claim of the next expansion of the most highly-populated country, how do you find the next (Chinese) Wal-Mart (WMT) in its infancy stage?
Over the next several weeks (on Tuesdays), I'll be talking about different companies (most of them Chinese companies) that will be positioned to take advantage of the next 10-20 years of China's massive growth.
Yes, I realize the global economy will slow down - hence the tremendous decline in commodities. But there is still no question that China is a country that offers some of the biggest long-term investment opportunities, the same way the U.S. offered them in the early 20th century.
Many of these companies expect their earnings growth to slow down. But the dimmed expectations are public knowledge and are priced into the stocks. They may not have hit bottom yet, but you should add these stocks to your future shopping list of stocks to buy when nobody wants them.
You are probably already familiar with companies like China National Offshore Corporation "CNOOC" (Symbol: CEO), which entered the global stage in 2005 when it made a bid for California-based Unical, the sixth-largest U.S. oil company. The deal was blocked by U.S. Congress. CNOOC has a five-year average earnings growth rate of 33% although earnings are expected to decline by 12% in 2009. The return on equity is 26% and although they have about $1.5B in debt, they have $7.6B in cash. The stock is off its 2007 high of $220.00 and now trades at about $56.00. It only trades at four times earnings.
Maybe you are familiar with Petro China (Symbol: PTR). This company, which was heavily accumulated by Warren Buffett's Berkshire Hathaway at much higher prices, was ranked first in Forbes' rankings of leading companies in China ("Forbes 2000 rankings"). Last year Petro China discovered the largest offshore field in Asia in 33 years. Its quarter over quarter revenue growth has been accelerating. Its five-year average earnings growth rate is 20% although earnings have slowed to a stop. The return on equity is 17%. It has about as much cash as it has debt. After hitting a high of $260.00, the stock has dropped down to $57.00. It trades at about six times earnings.
Another popular Chinese company is China Life Insurance (Symbol: LFC). Now here's a company that has slowing growth, in terms of revenue and earnings. However, it has a return on equity of 18% and the average five-year earnings growth rate is 82%. At first glance, it has a PE of 16. But with virtually no debt, LFC has over $14.00/share in cash as it trades at $33.47 (off of a high of $110.00 in 2007). So back out the cash and you have a $20.00 stock with a PE of 10. LFC has close to 40% market share in China.
These are not recommendations to buy RIGHT NOW. But I will be giving you more Chinese companies, and other companies, that are poised to benefit from China's domestic growth - even after a slow down. Remember, these are ideas for the VERY long-term for those who want a piece of the China pie.
In markets like the one we are in, people run away from stocks as fast as they can. They forget all about the fact that they looked at the greatest companies on earth just one year ago, frustrated that they were so overvalued. Don't forget about China, folks. It's known as the "sleeping giant".
[Editor's Note: What sleeping giants do you see in China? What do you think about China's stock market? Click below and leave your comments.]
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
