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Hop on the Chinese Roller Coaster

By Todd Wenning - Updated Nov 11, 2016 at 4:51PM

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Hang on -- it might be a bit bumpy.

For most investors, buying Chinese stocks can be either an exciting proposition or an intimidating one.

Oddly enough, that's similar to the reaction you get when you ask people whether they like roller coasters. If you've followed the Shanghai Composite over the past five years or so, you can certainly feel like you've been on the Vortex at Kings Island. Consider:

2004

2005

2006

2007

YTD

(15%)

(8%)

130%

97%

(60%)

Source: Yahoo! Finance.

Whew. At this point, you're either running for the bathroom, or racing to get back in line for another ride.

Was it worth it?
Despite all of that volatility, the Shanghai Composite has still risen by 40% during this period, while the S&P has lost 11%.

Since last October, however, the Chinese markets have plummeted. China Life Insurance and PetroChina have seen billions of dollars in market capitalization erased, though those losses pale in comparison to those sustained by our own Fannie Mae (NYSE:FNM), Freddie Mac (NYSE:FRE), and Wachovia (NYSE:WB) over the same stretch.

Some investors will inevitably view the plunge in Chinese shares as a comeuppance, but others see it as a fresh opportunity to put money into the Chinese markets. Last May, Motley Fool Global Gains advisor Bill Mann called China "The World's Greatest Value." And even though the global markets have taken a turn for the worse since Bill's article was published, he recently re-emphasized his belief in the Chinese miracle.

Is he crazy?
You don't typically hear the words "value" and "China" muttered in the same breath, but there are definitely some better buying opportunities in the aftermath of the sell-off. Some shares that may have seemed too expensive to investors last October have returned to more reasonable valuations.

For example:

Company

P/E October 2007

P/E Today

5-Year Estimated EPS Growth Rate

WuXi PharmaTech (NYSE:WX)

129

11

25%

American Oriental Bioengineering (NYSE:AOB)

26

8

24%

CNinsure (NASDAQ:CISG)

68

11

30%

Sources: Capital IQ (a division of Standard & Poor's) and Yahoo! Finance.

All three of these companies are led by entrepreneurial founders and innovators, exactly the types of companies that investors should be looking for in China, instead of stodgy state-owned enterprises (SOEs) like China Telecom. Moreover, they are tapped into two very promising industries (pharmaceuticals and insurance) that are poised to grow as the Chinese economy expands. Whether or not these are the companies that will come out ahead remains to be seen, but thanks to the dip in their share prices, they present us with three intriguing research ideas.

That's why Bill and his team of Motley Fool Global Gains analysts made their second trip to China earlier this year, to meet with some of the country's most promising companies. The team also made stops in Vietnam, Indonesia, and Singapore. If you'd like to read their reports, and take a peek at all the Global Gains recommendations, a free 30-day trial to the service is yours. Click here to get started.

This article was originally published on June 4, 2008. It has been updated.

Todd Wenning would not want the job of amusement-park custodian, but he respects those who put on the uniform. He does not own shares of any company mentioned. American Oriental Bioengineering is a Motley Fool Hidden Gems recommendation and a Motley Fool holding. The Fool's disclosure policy hopes everyone had a great Thanksgiving.

None

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Stocks Mentioned

Federal Home Loan Mortgage Corporation Stock Quote
Federal Home Loan Mortgage Corporation
FMCC
$0.63 (3.52%) $0.02
Federal National Mortgage Association Stock Quote
Federal National Mortgage Association
FNMA
$0.66 (3.17%) $0.02
American Oriental Bioengineering, Inc. Stock Quote
American Oriental Bioengineering, Inc.
AOBID
$0.00 (-99.99%) $-2.75

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