How To Find Winning Chinese Stocks
The Dynamic Wealth Report
October 1, 2009
The Secret To Making Big Money In Chinese Stocks
by Robert Morris, Editor
The Chinese stock market’s on fire this year. Year to date the Shanghai
Composite is up a hefty 51%. That compares with an 11% rise for the Dow,
a 17% increase for the S&P 500, and a 34% gain for the NASDAQ.
Investors are buying up Chinese stocks hand over fist for three main
reasons.
The Chinese economy is growing faster than any other this year (better
than 8%). The Chinese government’s $587 billion in stimulus spending is
giving a boost to corporate growth rates. And, low interest rates are
enabling Chinese companies to cheaply borrow money to fund their future
growth.
All of these policies are combining to fuel a high growth environment in
China.
I’ve been a big fan of Chinese stocks all year.
Subscribers to my investment advisory services can vouch for that. They’ve made a lot of money this year
in Chinese companies. I don’t mean to
brag… but, we’ve seen gains of 105%, 155%, 233% and 271% in just the
past seven months. (And, I think they’re heading even higher.)
Our success has prompted lots of questions.
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People are always asking how I consistently find these great Chinese
stocks. I usually smile and tell them its “classified” information. But,
today I’m going to share a bit of my process with you.
As an added bonus, you’re going to learn about a Chinese stock with huge
upside potential.
The two main things I look for are a high growth rate and a
reasonable price. This year I’ve been finding a lot of Chinese
companies
with these characteristics.
Right now the average long-term earnings growth rate for stocks is about
16%. But, I want something better than average. That’s why I look for
companies with projected annual growth rates of 20% or more.
However, a high earnings growth rate by itself doesn’t mean it is a
good investment. You have to look at the price relative to that
growth rate.
That’s where the PEG ratio comes into play.
The PEG ratio is a simple way to tell if a company is overvalued or
undervalued. You simply divide the P/E ratio by its long-term
projected growth rate. For example, let’s say you’re looking at a
company
with a P/E of 10 and a projected growth rate of 25%. Divide 10 by 25 and
you get 0.4.
What does this number mean?
A PEG ratio of 1.0 means the stock is fairly valued relative to its
growth rate. A score higher than 1.0 means it is overvalued. And,
a score below 1.0 means it’s undervalued.
In our example, a PEG ratio of 0.4 indicates the shares are significantly
undervalued.
Buying stocks with high earnings growth rates and low PEG ratios can
lead to huge profits. If the company is otherwise fundamentally sound,
you can bet the market will eventually drive the price up.
What’s more, in a strong economy or hot market, you’ll often see
shares trading at significant premiums to their growth rates. PEG ratios
of 1.5, 2.0, and higher are not uncommon in frothy markets.
A word of warning…
Those with high growth rates and low PEG ratios by themselves aren’t
necessarily good investments. As always, do your due diligence before
buying.
Now, as promised, here’s a high growth Chinese stock trading at a very
reasonable price.
Introducing, China-Biotics (CHBT).
CHBT is one of the largest suppliers of probiotics in China. Probiotics
are beneficial, live bacteria used as dietary supplements and food
additives. They help improve intestinal health and digestion.
Demand for probiotics in China is rising rapidly. A Beijing research
firm predicts the market will more than triple next year.
And, CHBT is benefiting nicely from this trend.
Last quarter, revenue jumped 35% year over year to $15.4 million. Gross
margins were high at over 70%. Net income soared a whopping 78% to $5.8
million. And, earnings per share of $0.31 handily beat estimates by 14
cents.
The outlook for the rest of fiscal year 2010 is very good.
Management sees revenue surging by at least 50%. And, earnings are
expected to jump 30% to $1.30 a share.
Despite this high-powered growth, CHBT is trading at a deep discount to
its growth rate.
The projected long-term growth rate is 30% annually. At a recent price
of $16, the stock’s P/E ratio is 12 times the current year estimate. This yields a PEG ratio of just 0.4.
In other words, the stock’s trading at a 60% discount to its long-term
growth rate. You can see this has a ton of upside potential.
CHBT is a perfect example of what I look for. A solid product
in a fast growing market. High revenue and earnings growth. And, a cheap
price.
This combination usually leads to huge investment returns. Take a closer
look at CHBT today for your own portfolio.
The iPath S&P GSCI Crude Oil Total Return Index (OIL) jumped more than
5% yesterday. A spike in oil prices above $70 a barrel was behind the
upward move. Oil prices surged following a report that gasoline
stockpiles dropped unexpectedly and demand increased from last year. OIL
seeks to replicate the performance of the Goldman Sachs Crude Oil Total
Return Index.
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