Tim Hanson is in China researching stocks with the Global Gains team. This column is one of the dispatches he wrote in Beijing and emailed back to international investors interested in China's growth story. To sign up for all of Tim's dispatches from China, visit china2010.fool.com.
"Our stock sucks."
That's a direct quote from one of our company meetings today, and it was an underlying theme of another. Yet neither of the companies we talked with thinks its stock is a bad investment. In fact, they believe just the opposite!
But they're both disappointed in what they view as a massive divergence between the stock's underperformance and the company's outperformance.
Profit from a manic market
Now, it's possible to sympathize with a company that thinks it's being mistreated by the market, but the fact is that the divergence between a stock's performance and the company's performance is precisely what gives investors great buying opportunities. The key, of course, is to figure out why the divergence has occurred, and whether it's warranted. If the answers are "Because the market is manic" and "It's really not warranted," you might have a fantastic opportunity on your hands.
One potential opportunity is Yongye International
Why? Well, our working theory is that investors are dumping Chinese stocks en masse, because they're scared about housing prices, bank failures, and a lack of investor disclosure. But rather than measure individual Chinese companies against these rational concerns, they're taking the easy way out and getting rid of their Chinese exposure altogether -- just as an energy bear would dump oil stocks.
But we think this is short-sighted, and we believe that some of the best investing opportunities come from finding top-quality companies in out-of-favor sectors. Yongye, for example, has no exposure to any looming housing crisis, and sales of its organic fertilizer product continue to benefit from the government's efforts to increase food production. (In fact, Yongye is doing everything it can just to keep up with demand). And when it comes to transparency, Yongye, unlike many of its peers, employs Big 4 auditor KPMG to sign off on its numbers. Finally, although some investors are worried about Yongye's recent purchase of a "customer list" from one of its major distributors -- price tag: about $30 million in cash and stock -- the deal should start to benefit the company immediately. It's also a savvy way to vertically integrate Yongye's business without the risk of acquiring a company that hasn't been held to rigorous accounting standards.
More where that came from
Yongye is up more than 50% since this time last year, and we think the company still has a bright future. (If you're a Global Gains member, you can get our complete notes from today's meeting on our members-only discussion board right here.) Yet we believe that there are more companies in China like Yongye, and that the market's recent performance might give us the opportunity to buy them for cheap. With that goal in mind, tomorrow we're delving into the advertising sector -- an industry that was hurt last year by falling consumer spending, but which should rebound strongly alongside increased Chinese purchasing power.
Stay tuned, and be sure to sign up for our free email dispatches from the road in the box below:
