The Investment Opportunity of a Lifetime

If you've never followed George Soros, now is the time to reconsider. 

See, Soros has spent nearly 50 years studying boom-bust cycles, including the international banking crisis, the collapse of the British pound sterling, and the Asian financial crisis. He's made billions both on the upside of those bubbles and during the panic on the downside.

In fact, he predicted that a housing crash following years of overspending would fuel a severe recession, and he emerged from retirement to earn a ton of money during this financial crisis.

In the aftermath of the housing and credit bubbles, we would do well to ask him what opportunities he sees these days.

The short answer: China
In his book The New Paradigm for Financial Markets, Soros reveals that during his visit to China in late 2005, he "saw greater opportunity than at any other time in my career." He called China -- with its rapid GDP growth and the potentially lucrative privatization of state-owned enterprises (SOEs) -- "the opportunity of a lifetime."

The recession hasn't changed his mind. On the contrary, in a speech at Shanghai's Fudan University, he said he believes that, "China has been recovering and its pace of recovery will be faster than the rest of the world."

And we have the opportunity to pick up some high-growth names at reasonable multiples -- cheaper even than Soros was touting in 2006. China Mobile (NYSE: CHL  ) , the dominant mobile phone provider in China, Guangshen Railway (NYSE: GSH  ) , the dominant freight rail provider in the populous Guangdong province, and Sohu (NYSE: SOHU  ) , which is growing online ad and gaming revenue, come to mind.

So what has Soros so interested in China? It's largely the same moneymaking trends he saw in the U.S. during the 1980s.

How it went down here
Between the mid-1970s and the mid-1980s, the combination of high interest rates and an oil shock led to a long period of stock undervaluation. From 1977 to 1984, the S&P 500 mostly traded between 6 and 10 times earnings -- the average P/E since 1936 is around 16.

This phenomenon resulted in a number of highly profitable, undervalued cash cows. An acquiring company could sell shares or borrow money to purchase these cash cows on the cheap, and then use the acquired cash flows to pay down debt or sell more shares -- ultimately increasing its own net worth.

One of the larger deals at the time included General Electric's (NYSE: GE  ) multibillion-dollar deal for NBC. In part because of its deal-making savvy, GE appreciated several-fold during that time.

GE continues to make selective acquisitions to fuel its growth; yesterday it completed its purchase of RBS Factoring from The Royal Bank of Scotland. RBS Factoring is a major provider of accounts receivable financing in Germany.

Of course, the recession and GE Capital's considerable leverage could mean a slowdown for deals in the near term -- the conglomerate is even trying to sell off NBC to Comcast. In the meantime, consolidation by necessity is ongoing in China.

How it will go down there
There are around 100,000 Chinese SOEs -- about a third as many as during Mao Tse-tung's time -- many of them inefficient and unprofitable. To promote efficiency and economic growth, the government forces them out of business by barring state-owned banks from lending them money, or by simply transferring their assets to more efficiently run subsidiaries.

In short, companies with superior managerial skills and access to capital can swallow poorly run companies for a tiny fraction of their true worth, turn them to profitability, pay down their debt or issue new shares, and repeat the process.

And a market environment that is adding pressure on the least profitable SOEs is only accelerating this phenomenon. The result is one of the fastest-growing economies in history -- and the winners have largely been predetermined.

What to look for
Soros points to what he calls "super state-owned-enterprises," spinoffs from state-owned enterprises, which are:

• Well-managed
• Run by motivated leaders
• Blessed by the government
• Able to access parent-company assets

Soros' thesis is astonishingly close to the conclusion our Motley Fool Global Gains team reached upon returning from its second trip to China. Advisors Tim Hanson and Nathan Parmelee recommend a number of "state-sponsored enterprises," their terminology for companies with:

• Good management
• Motivated entrepreneurial leadership
• Government backing
• Access to capital

Here's a name
When our team visited General Steel (NYSE: GSI  ) at its Shaanxi facility, management told the team that the government is working hard to reduce the number of steel companies in China, which currently stands around 1,000.

General Steel's strategy has been to borrow money at modest interest rates and purchase controlling stakes in SOEs at massive discounts. That strategy is paying off -- sales have risen tenfold over the past three years.

The company's facilities are in prime locations to take advantage of growth plans. For instance, one rebar plant that General Steel acquired is in Shaanxi Province. Since rebar is expensive to ship, and there are no competitors nearby, the company's competition is limited.

So remember the advice of Soros and our Global Gains team for what may be the investment opportunity of our lifetimes: well-managed Chinese companies with motivated leadership, government backing, and access to capital.

Nathan and Tim are heading back to China this week to get a first-hand look at the top opportunities they see in China today. If you're looking for stock ideas and would like to receive free live dispatches from their trip in your inbox, simply enter your email in the box below.