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It's no secret that China's economy is ridiculously strong. The world's fastest-growing major economy expanded by an average of 10% annually over the past 30 years. Its GDP is a close second to the United States'. Goldman Sachs predicts that in less than 20 years, China will overtake the U.S. and become the world's largest economy.
Given this enormous growth, many investors are looking to China. At the end of 2010, it's expected that the five-year foreign direct investment (FDI) into China will total more than $420 billion.
But this heavy inflow of investment dollars has most notably gone to well-known Chinese companies.
Sure, behemoths like PetroChina (NYSE: PTR ) and China Telecom (NYSE: CHA ) are strong performers that pay dividends. But capitalized at $225 billion and $75 billion, respectively, they probably don't hold future astronomical growth for shareholders. Analysts predict just 5% annual earnings growth over the next five years for each.
Today, I'd like to share with you three much smaller companies positioned to cash in on China's rapid growth. They're capitalized at just a fraction of these Chinese juggernauts' size, and they come with strong, though hidden, catalysts for growth -- meaning your returns should be much greater than by simply investing in China's large caps.
I'll also tell you where I got these investment ideas from. But first, let me share these companies with you.
China's big pickle -- and how to profit
China's in a tough spot. It's the world's most populous country, with more than 1.3 billion citizens. But economically speaking, that means one thing: a lot of mouths to feed.
China already produces and consumes more fertilizer than any other country. However, it's losing arable land daily because of urbanization. The country must continue increasing farm yields just to keep up with the growing demand for food. Despite this need, pollution of China's waterways just keeps getting worse.
So China's strongly encouraged farmers to "go green," using fertilizers that have no environmental impact, but still deliver the necessary yield. This makes organic fertilizer a budding growth industry. In fact, while the overall Chinese fertilizer market is expected to grow at around 7% to 8%, the organic fertilizer market is expected to grow at 30% or more!
Two small-cap companies are already cornering the organic fertilizer markets in their respective locations.
The first, China Green Agriculture (NYSE: CGA ) is valued at just $212 million. Though it has near-nationwide distribution, most of its revenue is tied to central and northern Chinese markets. It's just getting started delivering new highly concentrated powder -- which means lower packaging and shipping costs -- which should be a boon to growth. What's more, its balance sheet is rock solid, with $62 million in cash and no debt.
The second company, Yongye International (Nasdaq: YONG ) is slightly larger, at $404 million. It's based in northern China and provides super-concentrated liquid fertilizer that promises farmers a high return on their investment. Yongye has an innovative marketing strategy to woo over Chinese farmers, who are notoriously opposed to change, and it's working better than expected. Yongye's balance sheet is also strong, with $25 million in cash and minimal debt.
Though both companies are growing strong, their stock prices haven't mirrored the success of their underlying business, which is why both make attractive opportunities today.
The trend no one's talking about
In 2009, China became Brazil's top trading partner -- a position previously held by the U.S.
It's simple. China lacks, but needs, raw materials, and Brazil has an abundance of them, creating an import-export match made in heaven.
How do you cash in on this relationship? With Banco Latinoamericano de Comercio Exterior, or Bladex (NYSE: BLX ) . This supranational bank operates throughout Latin America, though its business is largely concentrated in Brazil. It offers short-term loans and letters of credit to importers and exporters, easing the process for those moving goods.
Obviously, you'd be hesitant to invest in banks today, but this company has refused to engage in the aggressive lending policies that dug the graves of many American banks. In fact, nonperforming loans make up less than 1.8% of its total loan portfolio, while it holds reserves for nearly 2% of total loans. For comparison, at the end of 2009, Bank of America's (NYSE: BAC ) nonperforming loans totaled 3.6% of its loan portfolio, and it reserved for just 4.3%.
More importantly, Bladex comes with a huge margin of safety, trading for just 0.8 times book value and a 4.3% dividend. The team of analysts behind this stock recommendation says there's "no better stock" to cash in on trade between Latin America and Asia.
All the way to the bank
Most of the time, investing in the companies that everyone's watching won't help you walk away with mind-blowing profits.
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