From go-go growth investors to curmudgeonly value cheapskates, investors of all stripes appear to be converging on one destination lately: China.
This is a fairly unusual circumstance because growth and value types usually play at opposite ends of the pool. In the late '90s, tech stocks were the growth gang's game. In 2002, after valuations had imploded, value investors stepped in and picked up stocks previously priced on metrics like enterprise value-to-eyeballs for less than working capital.
The foregoing is actually a major oversimplification. The late '90s really belonged to large-cap tech. Investors like Michael Burry (of The Big Short fame) dug around the small-cap space for ignored and unloved tech stocks during those years, finding all sorts of bargains. I think this investor convergence on China is somewhat similar, in that the big stocks are pulling in momentum players, while languishing small caps attract bargain shoppers.
At one extreme, you have companies like Puda Coal
At the other extreme are small stocks like SmartHeat
Does fraud-free mean you're home free?
Because I'm of a value bent, that class of securities certainly has more appeal than big momentum stocks like Baidu, but I'm still extremely reluctant to invest in these smaller Chinese stocks. I suspect that American investors are being played for patsies in the case of many such companies that have come public via reverse merger. Even if any given company isn't an outright fraud or an earnings manipulator, U.S. shareholders still run the risk of being treated extremely poorly, and may have little recourse through the usual legal channels. My Foolish colleague Sean Sun walks through some of these matters in this fine article.
Dipping a toe in the water
One company that has come under fire recently is China Green Agriculture
That particular trade worked out, but if repeated over time, with companies into which I have less insight, such a strategy would inevitably blow up in my face. The Chinese small-cap space is a minefield, to be navigated with extreme care. For that reason, I believe it would be a mistake to take a concentrated position in a single name here, regardless of how good the reported financials look.
One for the watchlist
If you're dead set on going bargain-shopping in China, I would recommend the basket approach that has been utilized by the folks at Global Gains. Speaking of which, co-advisor Tim Hanson recently wrote about the service's Chinese Consumer Basket and shared his top pick within that basket -- an advertising company trading for less than the cash on its balance sheet. Click on over to read more about the challenges the company is facing and why Tim thinks this one's unreasonably cheap.
Never say never: Here's a peek at what I look for in a growth stock.
Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool owns shares of China Green Agriculture. The Motley Fool has a disclosure policy.
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