4 Reasons to Believe in China Again

I realize that China may be an intimidating place to invest in, especially given the recent volatility. It's hard to ignore a country with four times the population of the United States in any truly diversified portfolio, but I sense the trepidation in your hesitation.

I'm saying that I hear you.

China is at the other end of the world. The government doesn't exactly have a sparkling track record when it comes to defending free markets. Shenanigans are always a threat, and the cultural divide can be vast if search giant Baidu (Nasdaq: BIDU  ) can project a 15% top-line hit when it decides to come clean and ban unlicensed medical sponsors from advertising on the site.

The country's heady economy has also slowed since the Beijing Olympics' afterglow has dimmed.

However, I'm going to show you a bullish market indicator that you probably won't find anywhere else. Go into your quote engine of choice and punch in the letters J-R-J-C.

That is the ticker symbol for China Finance Online (Nasdaq: JRJC  ) , a stock that I recommended to Motley Fool Rule Breakers subscribers a few months ago.

Follow the research
The Chinese stock market data provider has been on a tear in recent weeks. The stock closed 8% higher yesterday -- on no major news -- but that's just more icing on the cake. Since the stock bottomed out at $4.48 on Nov. 25, the stock has soared 121%. There aren't too many stocks that have more than doubled in that time.

Don't say that I didn't tip you off.

"What does a diaper change and Tuesday's trading in China Finance Online have in common?" I wrote on Nov. 28. "They both smell like bottoms."

The company hit rock bottom after posting disappointing third-quarter results, but the bearishness felt overdone. CFO -- short for China Finance Online -- is packing the cash equivalent of $4.16 for each depositary share.

CFO's bread-and-butter business is servicing the 10.9 million registered users -- and perhaps more importantly, its 115,000 premium subscribers -- at its jrj.com and stockstar.com portals. CFO warned that subscription trends began to deteriorate in September, projecting a sequential top-line decline in the fourth quarter. Analysts, understandably, slashed the company's near-term earnings prospects.

I have warmed up to CFO as a leading indicator of China's trading activity. If investors are beginning to bet on CFO, it is also a wager on the improving health of Chinese equities.

It's a contrarian opinion, for sure. The rare analysts following the company haven't raised their forward expectations. However, until proven otherwise, I will argue that as CFO goes, so will the Chinese markets.

Bring in the bull during the year of the ox
I also have a few more reasons to get excited about China again, just in case you feel that I'm going out too far on the limb with the CFO worship.

Even the darling stocks have reasonable valuations
Remember when Chinese speedsters like Baidu and travel portal Ctrip.com (Nasdaq: CTRP  ) traded at ridiculous multiples? They are still growing at healthy rates, yet trading at just 21 and 20 times this year's projected profitability.

Optimism is brewing, if you know where to look
There are actually several Chinese stocks where analysts have been raising their bottom-line targets lately. For-profit educator Noah Education (NYSE: NED  ) , along with online gaming specialists Shanda Interactive (Nasdaq: SNDA  ) and Perfect World (Nasdaq: PWRD  ) , are moving up in the world. Analysts have hiked 2009 estimates of all three companies in the past three months. When projections rise as optimism sinks, it transforms an already attractively priced situation into a real opportunity.

Be one with the yuan
As stateside investors have been burned by leveraged banks and debt-saddled retailers, many of China's growth stocks have balance sheets flush with cash. CFO was quick to bounce off a 52-week low that was barely more than its liquidity, yet another stock like second-tier travel portal eLong (Nasdaq: LONG  ) is trading for pocket change above its $6.03 per American depositary share cash balance.

Healthy balance sheets are important, and not just from a value-investing angle. During this market lull where going public is a challenge and buying companies for stock is an insult, the public companies in China hoarding cash can orchestrate sector consolidation at attractive price points.

In short, the signs are there. Rolling up your sleeves, diving into the required due diligence, and smoking out some more winners is entirely up to you.

For related Foolishness:

Ctrip.com International is a Motley Fool Hidden Gems recommendation. Shanda Interactive, China Finance Online, and Baidu are Motley Fool Rule Breakers recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz is a fan of China's growth story, but he does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 06, 2009, at 10:50 AM, venkytalks wrote:

    Stock price movement like this after a crash usually indicates that price manipulators and speculators have laid hold of the stock with promotor connivance.

    Cash on balance sheet ... er...Hear about Satyam's 1.6 billion cash balance anyone?

  • Report this Comment On February 09, 2009, at 5:34 AM, s0ros wrote:

    This is all the usual intermittent euphoria in a bear market.

    The globe depends on the US consumer, with a 31.5% share of nominal GDP, China ALL the more so, the former's wings are badly clipped, and there is no end in sight at all.

    Although I follow several indicators, for the layman, common sense would dictate that the US ISM index should be above 45 heading higher each month for > 3 months, to even start dreaming of a bottom.

    I do not think this is gonna be handled good, these dudes are goofin', I say we're headed for a "L" shaped recovery starting sometime 2010, with the lower portion looking more like a "C".

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