7 Speculative Chinese Small Caps

by: Bruce Vanderveen

Looking for investments outside the U.S.? You are not alone! With the dollar plummeting almost daily, money seems to be fleeing U.S. shores faster than the Fed can print it.

Just look at the Wild West . . . er, I mean Wild East of stocks. East as in China -- the largest emerging market. Now look at small-caps. Scared yet? After the Tuesday's action you should be -- some Chinese small-caps fell 9-10%! But wait . . . Yes, you can find value and growth in Chinese small-caps.

Consider China Sky One Medical (OTCPK:CSKI): A P/E under 4, no debt, yoy revenue growth of 27%, and a Price/Sales ratio of 1. Look at Duoyuan Printing (NYSE:DYP) with its PE ratio of 1.4. Then there is Fuqi International (OTCPK:FUQI) which you can buy for only slightly more than its $6.27cash per share. FUQI and DYP sell for less than 70% of annual sales and have P/E ratios less than 4. Other Chinese small-cap values exist in China Electric Motor (OTCPK:CELM), China Security & Surveillance (NYSE:CSR), L&L Energy (NASDAQ:LLEN), and Universal Travel Group (UTA).

With those numbers, how can you not like these stocks? . . . I know! I know! Mr Market can be quite ingenious at finding ways of torpedoing the most obvious "buys". But, like I said, this is the Wild East and anything can happen. What goes down fast can go up just as fast.

Risks? Where do we start? Jim Chanos says China is the next Enron. Sudden currency changes, interest rate adjustments by decree, an unpredictable government (I hesitate to use the word communist), and accounting irregularities are but a few of the potential negatives. Volatility is frightening -- the smallest rumors can rocket up or torpedo prices.

Wealth management firms such as Northern Trust (NASDAQ:NTRS), burned by the 2008 crash, plays it conservative. The firm won't recommend Chinese small-caps for its clients -- it would violate Northern Trust's fiduciary responsibility. Individuals, if they play it right, can profit from some of the fastest growth markets in the world. Dale Carnegie said "All life is a chance. The man who goes farthest is generally the one who is willing to do and dare".

Do your own due diligence. Small cap stocks are volatile everywhere, especially so in China. My approach is to take small positions in several companies, sell those that fall 10% or so, but let the winners run. Who knows? You may tap into a Chinese superstar.

Think positive to avoid the Chinese market's Dr. Loveless-like twists and turns. James West and Artemus Gordon protected and won the day for the U.S. Maybe you can't protect the U.S. -- or you may be able to protect and enhance your portfolio.

Disclosure: Small Positions in CSKI, DYP, and FUQI