Still Bullish on Chinese Microcap Stocks

by: Bull in the China Market

In April 2008, I recommended a portfolio of nine Chinese smallcap stocks (see “Bullish on Chinese Microcaps”). If you had invested an equal amount of money in each of these stocks, you would have realized a 39% gain during this period. In comparison, the S&P 500 declined 18% over the same time frame.

My biggest gain came Universal Travel (UTV), a web-based Chinese travel company, which I sold right before its move to the NYSE. I accumulated UTA at prices ranging from $1.41 to $9.75 and eventually sold at $14.90. I don’t hold any shares of it currently, but it looks increasingly attractive after its pullback to the $10 range. I continue to hold China Agritech, which actually fell below $1.00 per share before reaching the current price of $35. As these examples make clear, explosive gains were available in these little-known stocks.

And what about today? I remain bullish on Chinese microcaps, and anticipate that this may be one of the best performing sectors of the stock market over the next year. US investors are looking for more foreign exposure, and the valuations on these stocks remain very attractive.

Here are my five favorite picks for the year, each of which I hold in my personal portfolio:

  1. SINO AGRO FOOD INC (OTCQB:SIAF, current price =$1.37): Sino Agro is a diversified organic food company with a top notch CEO and strong ties to the Chinese government. This company is projecting $.32 EPS in 2010, but the share price is only $1.37. Can you really buy a growth stock in a hot economy at a PE level of under five? Yes, you can, and this is exactly why these microcaps are the place to be in 2010.
  2. CHINA PHARMA HLDGS (CPHI, current price = $4.05): I like Chinese healthcare stocks, because they are not dependent on exports to the US and Europe—dicey in the current environment—but rather serve home-grown consumers, with their rising standards of living. China Pharma sells pharmaceutical and nutritional supplements, and recently reported 23% growth in sales year-on-year, and a 70% growth in EPS. Yet the PE ratio is under ten.
  3. CHINA ARMCO METALS (CNAM.OB, current price = $4.00): This company is expanding from its metal distribution business into metal recycling. The PE ratio here is also under ten, while 2010 promises to be a year of accelerating growth.
  4. CHINA NEPSTAR ADS (NPD, current price = $7.31): China Nepstar is the largest drugstore chain in China. The company is expanding rapidly, both via acquisitions and organic growth, and pays a dividend—a sign of its shareholder friendly attitudes.
  5. TIANYIN PHARMACEUTICAL (TPI, current price = $4.81): This is another Chinese microcap that pays a dividend, and generates a 3% yield, in addition to solid prospects for price appreciation. The company received approvals to sell two more drugs from the Chinese government just this week, and looks poised for another record year.

Disclosure: I hold positions in the stocks recommended in this article.