Market Correction Highlights Chinese Small-Cap Opportunities

Includes: BSPM, SOKF
by: China OTC Player
By Hungry Panda

Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception. -- George Soros

With the three headed monster of the 3Gs ravaging world markets (Greece, Goldman (NYSE:GS), and the Gulf), several high profile investors have made headlines claiming that China is on a path for collapse. Marc Faber has made the news rounds stating that in nine to twelve months, China will experience a market collapse.

Predictions like these remind me of the John Kenneth Galbraith saying: "(t)he only function of economic forecasting is to make astrology look respectable." Simply put, while anything can happen in the next few months, it seems unlikely an economy with such vast reserves and demonstrated growth will experience anything but a minor market correction. And such a correction could present a buying opportunity.

In recent days, China has made efforts to curb the inflamed real estate market by restricting lending practices. Together with Hong Kong, Lisbon and Spain, the Shanghai Composite Index (SSEC) (2,868 at the time of writing) is one of the few major bourses trading below both its 50-day (3,051) and 200-day moving average (3,093), and also below its February low.

Also, while U.S.-listed Chinese large and mid caps have performed well with some significant gains, our small-cap heavy Rising China Stock Index has struggled.

Prieur du Plessis' technicals seem to signal an overall downtrend of the Index leading to an enhanced environment for stock pickers.

Volatility appears to have increased across the market and the majority of our holdings have fallen to very attractive levels. Previously discussed SOKO Fitness and Spa Group (OTC:SOKF) has eased to around $4 a share, off its 52-week high of $4.94, while Biostar Pharmaceuticals (NASDAQ:BSPM) is now way below $4.

The argument is that the majority of Chinese small caps are at incredible valuations. Companies like SOKF boast a 84% client retention rate, even while it conducts its business in uniquely thriving market segments. SOKF has a sub 10 mulitiplier and solid earnings growth, and is a clear example of a quality company with demonstrated growth and strong balance sheet that presents an excellent buying opportunity in this current market pullback.

Disclosure: Long SOKF.OB, BSPM.