by Jamie Dlugosch | January 12, 2011 11:48 am
In preparing my best stock picks[1] to buy in 2011 I uncovered several trends that will be positive for investors in the coming year. These trends are likely to carry stocks within that trend higher than the overall market.
Some of the trends are well known and discussed frequently by the media and pundits, but are still noteworthy. For example a recovering global economy is likely to boost oil prices well above $100 per barrel in the coming year. The vast amounts of stimulus in the system nearly guarantee such an outcome.
Other trends may not be so obvious or widely mentioned. With these discoveries the returns can be significantly greater than the overall market. Finding one of these opportunities presents opportunity in advance of prices being bid up.
I believe I have found such a trend with the market for U.S. traded Chinese companies. Stocks in the group are significantly undervalued for many reasons. Most of these reasons have little merit or represent mere speculation that is unlikely to materialize.
The fact of the matter is that Chinese companies trading in domestic markets are downright cheap. Given the growth prospects investors are likely to make out like bandits as the air clears in the group and value is properly given to these shares.
I rarely choose any one stock on my list of 10 as a favorite pick. This year is different. I am so enamored with this investing theme that I have made China Biotics (NASDAQ: CHBT[2]) my top stock pick of the year. A close second is L&L Energy (NASDAQ: LLEN[3])
China stocks are down for many reasons. One of the biggest overhangs is concern over fraud. With fraud being front and center in 2010 worries over fraud with Chinese stocks negatively impacted the entire group.
Another big concern for investors in China is the potential for the Chinese economy to drastically slow its growth. During the last quarter of 2010, the central government in China lifted interest rates in an attempt to cool inflation.
Investors took the moves to somehow mean that cooling inflation meant that growth would become nonexistent. That is hardly the case. The intention of the rate increase is to prevent inflation. As we saw in the U.S for some 20 years economies can grow significantly without inflation.
As the worry over these two factors alone decrease stock prices are likely to gain. What will be left behind are companies that will likely grow and grow quickly. Investors will reward that growth with higher stock prices.
Not content to wait in the wings for this transformation, private equity investors are beginning to snoop around looking for bargains. With bags of cash they swoop in offering a small premium in order to lure investors to part with shares.
Whatever fate awaits these companies the odds for investors today to make money are extraordinary. Here are three names to consider:
This name is indeed my favorite stock for 2011. China Biotics (NASDAQ: CHBT[2]) provides research and development, production, marketing and distribution of microbial products in China. The company is a leader in the intestinal microbial balance market believed to protect against high blood pressure while enhancing the function of the entire immune system.
The company’s shares trade on the New York Stock Exchange and have been mentioned previously as a possible take-over target for the private equity market. The attraction is from a valuation and growth perspective. Shares traded below $10 per share in 2010, but have since rallied to just under $15.
Estimates for profits in the year ending March, 2011 are at $1.68 per share. That puts the forward earnings multiple at 8. The estimate for 2012 is $2.22 per share or an earnings multiple of 7.
Investors can buy that 32% growth for 7 times the 2012 estimate. I had to double check my numbers to make sure I wasn’t seeing things. This sort of valuation compared to growth opportunity is unheard of.
It won’t last long. Either investors bid up the share price in recognition of that value or a private equity firm will buy the company at some below market premium. I prefer the former as that outcome should result in a double from current prices.
Last year I recommended this stock as a penny stock winner when writing the newsletter of the same title. No longer a penny stock L&L Energy (NASDAQ: LLEN[3]) represents all that is wonderful about Chinese companies trading on US exchanges in that shares trade for a low valuation and yet growth prospects are fantastic.
L&L is a coal mining operation with interests in two major mines in China. Prospects for the company are outstanding with Chinese utilities racing to buy coal to provide power to the fast growing country. Like the U.S. China is hoarding coal in reserve to make sure that power needs are met.
The one analyst covering the company expects a profit in the current fiscal year ending April 30, 2011 of $.155. With shares trading just above $10 the company is valued at just under 7 times the 2011 estimate.
One of the reasons L&L trades at such a reasonable price is directly related to unfounded fraud concerns. As recently as Monday one well-known television analyst complained about the company flaunting its recent inclusion in the Nasdaq Global exchange. Sounding the same alarm bells about possible fraud with reverse China Mergers the analyst made his customary caution against investing in companies like this.
As was noted in the column inclusion on an exchange is no reason to buy a stock, but simply promoting that fact alone is not a basis for fraud. Inclusion on a major exchange is big news that deserves to be promoted. Liquidity matters and getting the word out about something that improves liquidity is important.
As was also noted in the article U.S. exchanges require audited financial statements something that L&L currently complies with. It is a stretch and a bit Chicken Little to worry about financial statement being complete fantasy or fraudulent.
I prefer to believe such matters are infrequent thus painting a broad brush against all stocks of this sort is an opportunity for investors. I would jump all over L&L at current prices.
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