The S&P 500 (SPX) is approximately 44% down from October 2007’s high.
The Dow (DJI) is approximately 40% down from October 2007’s high.
The Nasdaq Composite (NASD) is approximately 46% down from October 2007’s high.
And the market appears it will go even lower!
Today, I want to discuss the forgotten market that people seem to shy away from.
During a time when the market takes off and rises, all astute long-term investors dream about is which companies they would buy if the market were to tank. However, when the market does tank, most investors forget about the big-time discounts and the aspirations of a once-in-a-lifetime opportunity.
Don’t forget, the reason stocks are getting hammered in the first place is that everyone is bearish, selling and thinking about the current gloom-and-doom scenario. When the same people are confident, the market is overbought.
As I mentioned in last week’s article, Warren Buffett is a big buyer of U.S. stocks. He has a 10-year outlook. But do you remember the huge economic explosion that everyone and their neighbor was dying to break into?
What ever happened to your love for Chinese stocks? What about the explosive growth potential?
After seeing the Shanghai Composite trade from 1,000 in mid-2005 to more than 6,000 in late 2007, investors were licking their chops wishing the market would tank so they could buy into the companies that would benefit most from China’s rapidly expanding domestic demand.
The smartest investors in the world from Warren Buffett to Jim Rogers were talking about investors in China making fortunes overnight, the way immigrants to the U.S. did by getting in on the ground floor of the U.S. explosion.
500% gains in just two years are not uncommon scenarios for the Shanghai Composite. It was created in 1991 when it went from 100 to 250, and continued to 1,200 in 1992. Then after dropping to 400, it ran up to 1,600 within three months.
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The timeline continues with more of the same, so you can imagine it’s been incredibly volatile. In the following 15 years, the Chinese stock market gave you numerous opportunities to make several thousand percentage points in profits.
Guess what folks? Here we go again!
We’ve just seen the Shanghai Composite drop from 6,000 to 1,000 (losing 70%) and, of course, it can drop further. (Awesome!)
The question is, when you decide to stake your claim of the next expansion of the most highly-populated country, how do you find the next (Chinese) Wal-Mart (WMT) in its infancy stage?
During the next several weeks I’ll be talking about different companies (most of them Chinese companies) that will be positioned to take advantage of the next 10 to 20 years of China’s massive growth.
Yes, I realize the global economy will slow down — hence the tremendous decline in commodities. But there is still no question that China is a country that offers some of the biggest long-term investment opportunities, the same way the U.S. offered them in the early 20th century.
Many of these companies expect their earnings growth to slow down. But the dimmed expectations are public knowledge and are priced into the stocks. They may not have hit bottom yet, but you should add these stocks to your future shopping list of stocks to buy when nobody wants them.
You are probably already familiar with companies like China National Offshore Corp. “CNOOC” (CEO), which entered the global stage in 2005 when it made a bid for California-based Unical, the sixth-largest U.S. oil company. The deal was blocked by the U.S. Congress.
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CNOOC has a five-year average earnings growth rate of 33% although earnings are expected to decline by 12% in 2009. The return on equity is 26% and although they have about $1.5 billion in debt, they have $7.6 billion in cash. The stock is off its 2007 high of $220 and now trades at about $56. It only trades at four times earnings.
Maybe you are familiar with PetroChina (PTR). This company, which was heavily accumulated by Warren Buffett’s Berkshire Hathaway at much higher prices, was ranked first in Forbes’ rankings of leading companies in China (“Forbes 2000 rankings”).
Last year PetroChina discovered the largest offshore field in Asia in 33 years. Its quarter over quarter revenue growth has been accelerating. Its five-year average earnings growth rate is 20% although earnings have slowed to a stop. The return on equity is 17%. It has about as much cash as it has debt. After hitting a high of $260, the stock has dropped down to $57. It trades at about six times earnings.
Another popular Chinese company is China Life Insurance (LFC). Now here’s a company that has slowing growth, in terms of revenue and earnings. However, it has a return on equity of 18% and the average five-year earnings growth rate is 82%. At first glance, it has a P/E of 16. But with virtually no debt, LFC has over $14 per share in cash as it trades at $33.47 (off of a high of $110 in 2007). So back out the cash and you have a $20 stock with a P/E of 10. LFC has close to 40% market share in China.
These are not recommendations to buy RIGHT NOW. But I will be giving you more Chinese companies, and other companies, that are poised to benefit from China’s domestic growth — even after a slow down. Remember, these are ideas for the VERY long-term for those who want a piece of the China pie.
In markets like the one we’re in now, people run away from stocks as fast as they can. They forget all about the fact that they looked at the greatest companies on earth just one year ago, frustrated that they were so overvalued.
Don’t forget about China, folks — it’s the “sleeping giant.”
Chris Rowe is the Chief Investment Officer for Tycoon Publishing’s The Trend Rider. To learn more about him, click here to read his bio.
