Sometimes it pays to stare into the jaws of a dragon. I surveyed the depressed state of Chinese stocks six months ago. It wasn't a pretty popular place to be, given the late-February meltdown that made Shanghai feel more like Shanglow.

After watching the Shanghai Composite Index come through with a 130% gain last year, it's easy to see why investors didn't want to appear greedy. Closed-end funds that specialize in China saw premiums turn into double-digit percentage discounts. And the six stocks I chose to single out were all trading well below their 52-week highs at the time.

"It shouldn't be that way," I argued at the time. "These companies are in all of the right areas. If you are serving an economy that has grown at a 10% annualized clip over the past few years, you should feel comfortable pitching job recruiting, life insurance, online games, Internet usage, and travel."

For the most part, I was right.

March 21

% off 52-week high

Since 3/21





China Life (NYSE:LFC)






106.2% (NASDAQ:NTES)



(10.4%) (NASDAQ:SOHU)








An investor who put an equal amount of money into each of the six stocks would have earned a 34% return today. Back home, the S&P 500 has provided a mere 2.7% advance in that time.

Lessons in the disparity
It wasn't a blowout run for all six stocks. Sure, Baidu has more than doubled, but even that wasn't a case of a steady ascent. You could have picked up shares of China's leading search engine in the double digits through most of April.

However, explosive bottom-line growth proved impossible to ignore, especially as the gains contrasted sharply with meandering stateside portals.

But let's take a closer look at the two stocks that have lost ground since my March column. There's a lesson there. See, eLong is growing as an online travel service in China, but the market leader -- (NASDAQ:CTRP) -- is growing significantly faster.

NetEase remains the market leader in online games. Its Fantasy Westward Journey remains the country's most popular fantasy role-playing game. However, NetEase's growth has stalled, while rival Shanda Interactive is growing at a healthy clip.

No stock is a continent
You can learn plenty from the two laggards. Quite frankly, NetEase and eLong haven't been the quality performers in their selective specialties over the past six months. Quality matters, even in the noble pursuit of geographical diversification.

You can't just buy a single Chinese company and assume that you're buying into an entire market. You'd chuckle if a foreign investor attempted to purchase a proxy for the United States by snapping up shares of a single retailer, computer maker, or airline. Even if an investor is sharp enough to buy into the right sector, individual players are unlikely to move in lockstep. NetEase and eLong may have been funky performers lately, but don't write off their industries. Ctrip and Shanda have seen their shares climb 27% and 19%, respectively, since March 21.

In other words, international diversification may warrant taking positions in a couple of different names within a particular country. You can achieve that by buying into a mutual fund, though hands-on investors may want to cherry-pick their own names.

And while you're at it, don't let relative valuations be your only inspiration. Ctrip trades at healthier multiples than eLong, but Ctrip has justified those premiums with its healthy growth rate. Baidu may seem pricey these days, but that's the same thing bears were saying back in March, when the stock was trading at half its current price.

Doesn't that make Baidu twice as expensive? Not exactly. Over the past three months alone, its estimate for next year's profit has grown from $2.84 a share to $3.67 a share. Paying 57 times 2008 earnings may seem rich, but keep in mind that forward multiples fall with every raised estimate. That's been a perpetual trend with Baidu, with the very gesture suggesting a headier growth rate.

So go ahead, be fruitful and diversify. Just do it the right way, making the most of meltdowns, and knowing that you may want more than one egg in your foreign-investing basket.

Other odes to investing in China:

NetEase and Shanda are selections in the Rule Breakers growth stock newsletter service. Ctrip is a Hidden Gems stock pick. Check out either service for more growth stock ideas, or give Shannon Zimmerman's Champion Funds a try to learn more about some of the top international stock funds. Don't worry -- all our newsletters offer a 30-day trial subscription offer.

Longtime Fool contributor Rick Munarriz speaks two languages fluently; neither one is Mandarin. He does not own shares in any company mentioned in this story. Rick is also part of the Rule Breakers newsletter research team, which seeks tomorrow's ultimate growth stocks today. The Fool's disclosure policy could go for some potstickers.