China Bears Should Hibernate

There has been a lot of talk over the last few weeks about how China is a massive bubble just waiting to explode. Well, it is high time for China bulls to push back. All the China bubble chatter misses a number of key underlying elements (I'll talk about these in a minute). I firmly believe that it is important for investors to have exposure to China equities in their portfolio for several reasons.

A short-term pull back in China stocks like we've seen the last three weeks doesn't mark an end to the country's remarkable long-term growth prospects. In fact, it just may have presented a timely buying opportunity allowing you to pick up shares of your favorite companies on the cheap.

I recently presented by thoughts on China and a few of my favorite stocks in an investing seminar, China Inc: Understanding China for Outstanding Profits. Just click here to watch the seminar now. In the webinar, I discuss why China's quasi-corporate structure will continue to reward investors. I also share a few of my favorite sectors and discuss specific stocks in each that have the potential to be big winners in 2010.

Those of you that caught the webinar have had a chance to pick up shares in my favorite companies at eye popping price levels. The recent erratic price movement in many China small-cap stocks has given astute investors a window that might not be open much longer. If you haven't already, I encourage you to check out the video and try a no-risk trial subscription to Small Cap Investor PRO. 

You'll find a number of extremely attractive China small-cap stocks in the portfolio, including a company that makes amorphous alloy core transformers for the Chinese market. The Chinese government has mandated that old silicon steel core transformers be replaced by more efficient transformers, like the amorphous alloy core ones that this company makes. Shares of this stock are already moving 5% higher today as many China stocks bounce back from the recent sell-off.

This goes for a few stocks I've recommended here in Small Cap Investor Daily as well. A few weeks ago I recommended China North East Petroleum (AMEX: NEP) when it was trading with a forward PE of just 8.7. I wrote, "I'd love to say wait for this stock to pull back to its 50-day moving average around $7.60 before pulling the trigger, but the honest truth is that I don't see a catalyst that will send shares that much lower."

Well, suffice to say that Beijing's directive to reign in liquidity was not expected right after this recommendation. But that catalyst came and shares of China North East Petroleum dropped to $7.82. I hope you purchased shares while other investors were heading for the exits, because they're piling back in now. The stock is trading back up to $8.98 (it's rising 8% just today) which puts its forward P/E at a mere 7.47. This stock will regain its recent highs before long.
I also recommended Lotus Pharmaceuticals (OTC BB: LTUS) on January 25 when it was trading with a trailing PE of just 4. I wrote, "Just sit tight while this stock fluctuates and in another six months you'll be very glad you did. It's not unreasonable to think that shares could double in the next year."

And fluctuate shares have, falling to $1.40 and providing a nice entry point (or a place to add to an existing position). At this level the stock is trading with a PE of just 3.4, dirt cheap even for a highly speculative over-the-counter traded pharmaceutical stock like Lotus. Look for shares to move higher in the near-term and much higher in the long-term.

The China bears are missing the key points on why China represents such a compelling investment right now. Domestic consumption is growing in China leading consumer spending to rise 16.9% in 2009. Not to mention, China's government is proactively dealing with monetary policy before inflation becomes an issue (U.S., eat your heart out). Finally, China is extremely friendly to foreign investors, despite its Communist government. And Beijing rewards investors that invest capital by having no capital gains tax, no estate tax, and no property tax.   

The recent sell-off has left Chinese stocks trading at dirt cheap valuations, despite their strong growth prospects. Right now is the time to take positions in quality Chinese stocks at attractive valuations. 

If you would like to learn more about the companies I recommend, I encourage you to begin a trial subscription to Small Cap Investor PRO. You can likely cover the cost of a yearly subscription within just a few weeks of investing in my favorite stocks. Plus there is absolutely no risk when you sign up for a trial subscription. Just click here to find out more about how you can get started with Small Cap Investor PRO today.