If you're like me, you probably think you've got it figured out -- the stuff that matters, anyway. But just in case, I hope you'll take a moment and read on.
In June 2007, and again about the same time last year, I was shoved aboard a plane and dragged around the globe. The idea was to confirm my impressions of the world, its markets, and most importantly, its people. What I found made me a better investor and a better person.
Myth No. 1: Two wheels good ...
For reasons you will soon find apparent, I'd like to focus today on China, a sprawling mini-continent home to more than 1.3 billion people. If you are like I was, you're probably thinking "Man, that's a lot of Wizard of Oz-era Schwinns and pointy straw hats." And you'd be right -- 20 years ago.
Now it's a lot of cars. Don't misunderstand: I knew that Shanghai and Beijing -- with its five-loop beltway -- would be a mechanic's paradise. But if, for you, China's "smaller" second- and third-tier cities conjure images of Chinatown circa the 1906 earthquake, you're in for a shock (more on the tier-two story in a moment).
In fact, you can't help but wonder how much better off General Motors or Ford would be if they'd gotten hold of a bigger piece of this market. It pained me to discover that, beyond the occasional Ford Focus and Toyota Camry, Volkswagen has all but cornered China's second- and third-tier markets. Or so it appeared to one American on the street in Shenzhen.
Myth No. 2: Small towns are small
Again, I knew Shanghai and Beijing were big. What I didn't know is that the "smaller" tier-two cities are big, too. That is, until I had the pleasure of traveling with my colleague Tim Hanson to five of the 20 or so Chinese towns bigger than Chicago. All are vibrant, modern cities -- no doubt twice the size they were when I was there this time last year -- my favorite being Xi'an, with its uncanny city wall.
Xi'an is also where I put to rest myths No. 3 and No. 4. The first seems a little silly in retrospect. I mean, maybe it's not completely insane to presume that a country that's home to McDonald's (NYSE:MCD), Starbucks (NASDAQ:SBUX), and Wal-Mart (NYSE:WMT), among other Western institutions, would speak a little English. But it's not true, either.
In fact, despite an infatuation with things Western, I doubt China's burgeoning middle class ever will adopt English as a second or "business" language. I don't think they'll need to. Just as sure as China's top businesses won't always rely on exports and massive trade surpluses -- for instance, the three we'll discuss just below.
And now for a delicate point ...
I mention my fourth observation cautiously -- having seen a small part of the country and knowing full well I may have this one wrong. But my biggest surprise was the apparent loyalty and buoyancy of the workers I encountered. I'm not sure what I expected, but these were not the ground-down, discouraged, and exploited laborers I'd read and heard so much about.
True, I visited a relative handful of Chinese companies. And some -- for example, travel agent Ctrip.com -- are white-collar businesses. China Green Agriculture, whose massive greenhouses we toured, is a relatively hands-on agriscience business, however. And our visit to China Fire & Security included a tour of a full-scale factory, albeit a high-tech one.
To be sure, the living arrangements seem at odds with what we're used to here in the United States. Often, the workers, mostly young men and women from the countryside, live in dormitories on campus. But my impression is that they were happily employed, even happy to be there. They certainly are friendly -- and sure love their basketball.
Of this I have no doubt
Again, I know that human rights is a challenge in China, and I have no illusion that all companies are as pleasant to work for as Ctrip, China Green Agriculture, and China Fire. Clearly, these three companies stand out among China's best. Which is a big part of why my colleague, global investing expert and my fellow traveler Tim Hanson, named them his top picks from our 2008 and 2007 research trips to China, respectively.
It may also explain why one stock is up 100%. The other has already quadrupled in less than a year -- not only outperforming such widely regarded U.S. stocks as Google (NASDAQ:GOOG) and even Research In Motion (NASDAQ:RIMM), but China celebrated winners Baidu.com (NYSE:BIDU) and CNOOC (NYSE:CEO) as well.
Of this I have no doubt whatsoever: Disproving my No. 5 China myth -- my idiotic notion that Americans aren't welcome there -- was pure pleasure. Having visited no less than half a dozen of China's cities, I can assure you that nothing could be further from the truth.
The people I met across China are among the most gracious and friendly I've met outside of Iowa. And this from a guy who accepted more than one dinner invitation with the awkward confession that "I won't likely eat anything with a head on it." (I feel oddly homesick just writing this column.)
The best China idea out there
But this is an article about investing, after all. As I mentioned earlier, Tim and I returned from our research trips to China in 2007 and 2008 with actionable investment ideas that are now up 100% and more than 400%, respectively. That's what got me thinking about this column.
Unfortunately, I couldn't make the research trip this year. But Tim just returned from China, where he traveled the country's rural heartland, visiting companies and searching for the next China Fire, China Green Agriculture, or other three-digit gainer. I think he's found it.
It's an even smaller agricultural products distributor with top-notch management and a remarkable marketing machine that's taking rural China by storm. According to Tim, this company may have even more potential than China Green Agriculture -- last year's triple.
If you'd like to hear about Tim's No. 1 China stock for 2009, here's how to do it. Simply agree to try Tim Hanson's Motley Fool Global Gains global stock research for 30 days absolutely free. There's no obligation to subscribe, and if you don't like it, you won't pay a cent. Of course, Tim's No. 1 pick is yours to keep. To learn more, click here now.
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This article was first published July 10, 2009. It has been updated.
Fool writer Paul Elliott does not owns shares of any of the companies mentioned in this article. Ctrip is a Motley Fool Hidden Gems recommendation. China Green Agriculture and CNOOC are Global Gains selections. Google and Baidu.com are Rule Breakers picks. Wal-Mart and Starbucks are Inside Value choices. Starbucks is also a Stock Advisor recommendation. The Motley Fool owns shares of Starbucks. You can see the entire Global Gains scorecard with your free trial. The Motley Fool has a disclosure policy.
