7 Stocks to Tame the Chinese Dragon

It wasn't too long ago when Alan Greenspan prophesied a "dramatic correction" in the Chinese stock market. In the months since, the Shanghai Composite Index has roller-coastered up and down. It's up a miraculous 40% since mid-May, but has also pulled investors down as much as 7% as well. Investors the world over seem to be waiting for bottom to fall out. Greenspan's clearly not the only one thinking such thoughts.

Asia's richest man, Li Ka-shing, echoed similar remarks, dropping the one word that shall not be mentioned. I'll give you a hint: It rhymes with "rubble," and we had a tech one some six years ago. Further doom was hinted at by the governor of the People's Bank of China, Zhou Xiaochuan.

So, is the Chinese market headed for catastrophe? And are investors with exposure doomed to failure? No, they're not doomed. I'm going to give you stocks that will help you profit, no matter what happens in the near term.

But before we get to the stocks ...
Though investors aren't doomed, the Chinese market is fairly overheated. Millions of Chinese citizens with newfound wealth are buying up stocks of companies they don't understand. More than 20 million brokerage accounts opened in China between January and May, a sum four times the number opened in all of 2006.

Moreover, the Chinese stock market is valued highly. The FTSE/Xinhua China 25 Index trades for nearly 40 times earnings. That's more than double the S&P's SPDRs here in the U.S.

Dare I say it?
Any correction is not going to last, particularly for companies with solid business models, good leadership, and a manageable capital structure. And that's because China's entire economy is expected to grow between 8% and 9% over the next five to 10 years.

Chinese productivity and export growth should also continue to expand. Meanwhile, a multiplying Chinese middle class will undoubtedly consume, consume, consume.

Regardless of whether China is the leading economic power in years to come, people should feel confident in the nation's ability to grow for the long term and overcome any near-term hiccups. Because it most certainly will.

Stocks that can survive the storm
To find stocks that will profit despite a correction or two, an investor must evaluate a company's business model apart from the rising tide of China's rapid economic growth. Ask yourself whether this business could succeed in a nation that wasn't growing as quickly. Similarly, evaluate the rest of the company as if it were a company in your own backyard. Is it producing free cash flow? Does it have manageable levels of debt? What are its competitive advantages? Are those advantages lasting? And, finally, does it have defensible sources of income?

A stock's exposure to China will only take it so far. It has to be a sound investment first. So I'm going to give you five stocks with promising exposure to the Eastern nation, a proven ability to generate free cash flow, and manageable debt levels:

Solid companies with great opportunity
Best Buy and Dolby are two solid American stocks that have China in their crosshairs. Dolby already brings in roughly 20% of its revenues from China and Taiwan and is currently allocating a large amount of resources and attention to the region. Meanwhile, Best Buy only brings in a marginal portion of its revenues from the nation, but is currently evaluating the massive strategic opportunity inherent there and has 138 stores currently in operation.

Aluminum Corp. of China and Yanzhou Coal Mining are two market behemoths that will supply the nation's growing thirst for raw materials. And finally, 51job and Giant Interactive are two more risky Internet stocks that have a niche opportunities in their respective industries.

The Foolish bottom line
Perhaps the Chinese market is poised for a correction, perhaps not. Of course, if a correction does come, it might just provide you with a great entry point for one of these stocks.

Regardless, China is growing rapidly, and you won't miss out on the action if you've got a financially sound company with a competitive edge to exploit. These are precisely the stocks we seek out at our Motley Fool Global Gains international investing service. In fact, the Global Gains team recently completed a tour of some of Asia's best investing opportunities and are now on their way to Latin America. Get all of their updates and analysis live from the field by providing your email address in the field below.