Looking for Growth? Invest in China Green Agriculture and China Automotive Systems

If you are looking for companies that are growing their businesses, it helps if the economy they are in is actually growing too. The most evident place this situation exists today is in China.

I did a screen to screen for growth. My criteria were:

1. Projected EPS growth over the next five years of greater than 25%.
2. Revenue growth last quarter of greater than 15%.
3. Price to cash flow (TTM) of less than 15.

I got a list of 5 stocks back. Two of these stocks were in a region of the world which has been consistently growing – China. This fact provides a little added security to your investment. If the overall region’s economy is growing, a top performing stock is likely to be able to keep growing.

The names of these two stocks are China Green Agriculture, Inc. (CGA) and China Automotive Systems, Inc. (CAAS). The actual statistics in these categories are:

Stock	Projected 5yr EPS Growth	Q1 Revenue Growth	Price to Cash Flow
CAAS	37.50%	16.55%	7.1837
CGA	35.00%	26.31%	11.6715

(This data is from TD Ameritrade)

Next I looked at what they did. The CGA profile from Yahoo Finance says:

China Green Agriculture, Inc. engages in the research, development, manufacture, and distribution of humic acid organic liquid compound fertilizers in the provinces in China. Humic acid is a natural, organic ingredient for a balanced, fertile soil, and the primary constituents of organic matter. The company produces approximately 119 fertilizer products. It markets its fertilizer products to private wholesalers and retailers of agricultural farm products. The company was founded in 2000 and is based in Xian, the People’s Republic of China.

This all sounds like music to my ears. I know agriculture stocks in the US and Canada have been doing well. I know grain commodities futures are one of the things people are buying as a hedge against inflation. I know grain commodities have been strong lately. I know the world population is growing. I know all of those people have to eat. This stock just makes sense.

The CAAS profile from Yahoo Finance says:

China Automotive Systems, Inc., through its interests in Sino-foreign joint ventures, engages in the manufacture and sale of automotive systems and components for the automobile industry in the People’s Republic of China. The company offers automotive parts, power steering gears, automotive steering gears, steering pumps, sensor modular, and electric power steering. It also offers integral power steering gear and pinion power steering gear for light and heavy-duty vehicles and cars. The company was founded in 2003 and is headquartered in Jing Zhou City, the People’s Republic of China.

This again sounds good to me. I know the Chinese car market has recently surpassed the US car market as the leader in new car sales. The population of China is much bigger than that of the US. (1.3B compared to 0.3B people). The Chinese economy has still been growing even through this worldwide recession. It makes sense that the auto industry (and by extension the auto parts industry) would be growing in this still quickly growing economy. I am cheered by this news.

Let’s examine a few more details about these stocks just to be sure they are in good shape. The following table was compiled with data from Yahoo Finance and TD Ameritrade.

Stock	CGA	CAAS
PE	13.2	17.2
FPE	8.88	12.50
PEG	0.32	0.42
Price/Sales	4.76	1.05
Price/Book	3.56	2.10
Price/Cash Flow	11.77	7.13
Short Interest	0.20%	1.59%
Held By Institutions	22.75%	4.33%
Shares Outstanding	18.6M	27.0M
Debt to Capital	11.56%	37.46%
Quick Ratio	2.86	1.1
Gross Margin	56.10%	28.39%
Net Margin	35.66%	8.96%
Float	18.4M	4.6M
Average Daily Volume	175,122	42,577

Both of these stocks still look good to me. They both seem to be worthy of investment. However, there are a few caveats. They are both lightly traded (see average daily volume statistics above). Therefore they can likely swing wildly. If the market goes down dramatically, they may go down with it (at least temporarily). Of the two, CAAS is the most worrisome. It has the smallest float. It has smaller margins. It is held less by institutions. It has the higher debt to capital percentage. Still it does have good P/CF, P/B, and P/S data. It is worthy of investment.

CGA may or may not become the biggest grower, but I like it the most. It is starting to garner institutional interest, but it is not yet mostly owned by institutions. As the institutional interest likely grows in the near future, the stock price should take off. It has high margins. It has the bigger float and the higher average daily volume. Plus, absolutely no one wants to short this stock. That is usually a good sign. This is the kind of stock Peter Lynch used to love.

As a final check, let’s look at the charts. Both of the near term charts look good.

We can see that CGA is above its 50-day moving average. It has retraced recently. Now it seems to be on another leg up. It is still well below its 200-day moving average. This stock fell precipitously from a high of about $29 last August. It has been moving up strongly recently. It seems likely this will continue.

We can see that CAAS is clearly above both its 50-day and its 200-day moving averages. It seems to be heading higher. It is under accumulation.

In summary, both of these stocks look like good near term and long term investments. However, the clear caveat is that they are lightly traded. If there is another big market downturn, they will likely get hammered because they are so lightly traded (i.e. some people will have to sell, so the stocks will go down). Some people say the markets are about to retreat now. Some say there is 10% more upside before we see a significant retracement. I am afraid I have no crystal ball to tell me exactly what the overall markets are going to do. These stocks do both seem likely to be longer term winners. They are stocks that should be on your radar. The timing of your buy and sell decisions is your own. Good luck.

Disclosure: I currently have no position in CGA or CAAS. These stocks are on my radar though.

Comments

[Glen Bradford:]

Live by the screen. Die by the screen.

Then write an article that takes no ownership of the screen.

Basically, what's the point here?

These companies are "relatively" expensive.

Looking over the seekingalpha contributors that you follow, I suggest following Paul Price.

Best of luck. I only hope to encourage your personal growth, not to put out the flame of stock market analysis.

Jun 14 11:08 PM

[David White:]

Hi Glen Bradford: Thanks for the comment. I will look at Paul Price. However, you did not read the article carefully enough, if you think I was just outright urging people to buy these stocks at the moment without buying them myself. The reason I did not buy either of these companies yet is largely because I believe the market is about to turn downward. Both of these stocks are very lightly traded. For this reason, they will most likely move downward in a downward moving market. As much as I believe they are good stocks to buy for the long term (I like CGA the best), I do not want to lose money in the short term. I am currently thinking of buying when the coming retracement is over. Some people think that the market will go all the way down to make a double bottom as it has done in previous bad recessions. I have presented this data now so readers will have the opportunity to put these stocks on their radar also. I am not advocating buying right now, unless you believe fervently that the market is only going to go up in the near term. I have drawn up a chart of comparisons relevant to CGA for you.

stock PE FPE PEG Growth Estimate This Year Growth Estimate Next Year
CGA 13.2 8.9 0.32 36% 28%
MOS 8.1 10.6 1.23 -9% 29%
TRA 5.0 9.3 2.91 -55% 9.5%
CF 7.5 11.6 3.42 -43% 3.2%
POT 11.2 10.3 4.81 -37% 64%

As you can see from this data CGA’s growth prospects are much better than those of non-Chinese companies in the same industry. CGA has the lowest FPE in the group. It has the lowest PEG by far. It has the highest two year growth estimate. Some people might discount it a little because it is Chinese. However, the Chinese economy is growing. The US, Japanese, and European economies are not. Plus China has a lot of people to feed. An agriculture/fertilizer stock in such a position is bound to do well. CGA is in fact not "realtively expensive". Yet I am still resisting buying it for the moment for the reasons cited above (and in the article).

Jun 14 11:40 PM

[Alan Young:]

I use completely different screening techniques, and coincidentally I also ended up picking these two companies, and just a couple other small caps, for most of my China exposure.

Obviously, we must be geniuses, since we both got the "right" answer!

Jun 15 01:23 AM

[beijingpaddy:]

Apart from the technical reasons for buying CGA, I can attest that in China there is an organic foods revolution of sorts taking place at the consumer level, to some degree driven by the food scares over the last two years or so. Now, almost every supermarket of any size offers both the internationally recognized organic certification and/or a Chinese indigenous certification system titled "green foods". The demand for clean food increases as incomes rise. So this is truly a growth industry.
Just make certain you are investing in the right companies in this sector as some I have reviewed are involved in trading activities of various sorts, (often not made clear in their annual reports), that will increase the risks of losing money or even going out of business. Unrelated to core business trading often is done by Chinese small caps (and once in a while larger caps but is rare) as a way of risk spreading and capital raising. Don't know about CGA as I have not done any domestic (China) research on them.

As most Chinese stocks should be considered long term buys for the smaller retail investor, my humble suggestion is to wait to see if and when the market declines, and then buy (and hold).
Buy cheap, sell dear.

Jun 15 02:14 AM

[FloridaBoy2:]

I looked at FEED earlier this year at $2. It too has done well. FEED does have a former Purina excecutive on board. I did not buy it or any other Chinese small cap due to the lack of transparency, liquidity, volatility, etc.

However, I do agree with your logic.

Jun 15 08:14 AM

[Alphameister:]

I like CGA. Hope to be able to buy near 7. Also looking at HOGS in the ag area which is a buy near 11 but I don't like the volume on today's decline so will probably wait a few days.

Jun 15 11:24 AM

[Vevey Hedge:]

I think CAAS is great and note that Cabot China seem to be interested in it - but please check out CALI which even despite the big spread seems very juicy and almost unkown

Jul 20 03:31 PM