Should individual investors think about investing in emerging markets? And if so, what is the best way to do it? One valid approach is to buy companies that sell products consumed by residents of those emerging markets. Perhaps that's what Warren Buffett had in mind when he was buying shares of PetroChina
Wall Street had a real love affair with all the Chinese stocks last year. Perhaps a bubble formed? PetroChina is down 31% since hitting an all-time high of $63.70 on Jan. 4, 2004. A quick look at the numbers reveals that this is not a wildly overpriced stock. It has a forward P/E of 12.3. It trades at about two times sales and two times book value. Its ROE is 22%. There are more good numbers than these, and they all compare favorably with other Chinese oil stocks.
Earnings for next fiscal year are expected to drop from $4.82 this year to $4.19. That could be trouble. However, there is a flaw in the estimates.
Most of the forecasting models for oil companies use an estimated oil price between $25-$30 per barrel. It has been more than a year since oil traded at $25. Using such a low price allows everyone involved to be very conservative and, potentially, very wrong.
That is not the real catalyst to consider buying stock in this company, though. The real story here is the expected massive increase in China's domestic oil consumption over the next decade. There is very little per capita consumption in western and northern China. Some liken these parts of the country to the western United States 150 years ago. China consumes approximately one and a half barrels of oil a year per Chinese citizen. There are estimates that call for an increase to nine barrels per year per person over the next 10 years. Estimates like this could turn out to be wrong, of course, but it is counterintuitive to think that the rural parts of China will not develop.
There are plenty of things that can go wrong for PetroChina and its investors. There is political risk, there are human rights issues, North Korea could cause some sort of problem, and there may be other risks that no one even knows about yet. While the long term seems to be in place, it wouldn't be a surprise if the next 20% in the stock's price was down and not up. A payoff should occur in the long run, but as with all emerging market stocks, make sure you fully understand the risk you're taking.
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Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, neither he nor his clients owned shares in PetroChina.