China OTC Companies: Buying Opportunities?

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 |  Includes: GCHT, JNGW, LLEN, ZSTN
by: China OTC Player

It was a rough week for China OTC companies, with the median performer in our 30-stock index declining by over 6 percent from the prior week's close. Losers outnumbered gainers by a margin of more than 2 to 1. By comparison, the S&P 500 was down by 4 percent, and the Russell 2000 by 3.5 percent.

The same factors that drove the broader U.S. markets down last week also impacted Chinese small caps, most notably the poorly received announcements by both the U.S. and Chinese governments that they plan to impose new restrictions on major banks.

But downward pressure on Chinese OTC stocks is likely to be short-lived, because their fundamentals haven't changed. GDP and earnings growth in China remain strong--albeit a bit too strong for the central government's tastes. China's tightened monetary policy will lead to a rise in interest rates, which will very likely translate into increased investment in China: Investment that I expect will benefit the Chinese consumer economy, and especially Chinese growth companies.

So although I'm feeling a bit singed from the past few days' trading results, I remain bullish on Chinese small caps. Aside from paring back a few unsatisfactory performers from my portfolio, I haven't changed my overall position. I've been looking for good buying opportunities, and am keeping an eye on the following:

Jiangwei International (OTCPK:JNGW): This software and data mining services provider popped on heavy volume Friday to a new 52-week high of $2.78, and appears to be right on the verge of breaking to the upside of an 18-month price downtrend. The P&F price objective is $7.50.

GC China Turbine (OTC:GCHT) This manufacturer of wind turbines defied the broader markets, rising 18 percent in the last two sessions to $2.75 at week's end. With the CEO expecting revenue growth of over 300 percent as the company works through an order backlog, this is one to watch.

ZST Digital Networks (OTCPK:ZSTN). Although ZSTN performed poorly last week, shedding nearly a third of its value and prompting me to sell half my position at $10.35, it is nearing oversold territory and may find support in the $8.25 to $8.50 range. I'm giving it a little more time, and the moment it appears to reverse its down trend I plan to jump back in and increase my holdings.

L&L Energy Inc. (NASDAQ:LLEN) This coal energy company had an ugly week, falling for the past 6 consecutive sessions on increasing volume. It has now given back almost all of its gains since mid-December, when it posted a stellar earnings report. Price action remains weak, but I am watching closely because LLEN bounced up off its 50 day moving average last Friday, and looks to have found some support at $6.00 about a month ago. If it holds above that threshold I'll be looking for a turn to the upside.

On balance I consider this a short-term buying opportunity and am looking to add to my China small cap holdings.

My Position: Long ZSTN