In the aftermath of the great calamity brought upon by the creator of the phrase “irrational exuberance,” the formerly revered Alan Greenspan, the giant pendulum of investor sentiment has moved to a new extreme: Irrational Despair.
Across the board, irrational despair is driving valuations to unheard of levels. Sellers are desperate for bids as their investors clamor for money back having, belatedly, realized that risk management is an oxymoron in the hedge fund community. Hedge funds are instruments that reward managers for risk taking and they have done so very well in the past (rewarded managers, that is). The fact that they are imploding simply leaves investors holding the bag: the managers have taken their seven figure bonuses in cash most likely.
However, there is good news to be found in the market. Irrational despair is creating some of the best buying opportunities seen in a generation. The despair found in the market isn’t due to rational decisions about growth prospects and valuations. Instead, it is pure panic inspired by fund flows and investor capitulation.
This investor despair is evident in many forms. Witness Wachovia’s (NASDAQ:WB) attempted fire sale - do you think there was panic in taking Citigroup’s (NYSE:C) offer? Wells Fargo (NYSE:WFC) obviously did and stepped in as all smart buyers do. In times of despair and panic, the smart money comes into play.
Further evidence of smart money getting into the market can be seen in Warren Buffett’s purchases of GE (NYSE:GE) and Goldman Sachs (NYSE:GS). Is there any smarter money out there? Not in my book. Others are following Buffett’s lead. Looking at the recent performance of financial stocks is gives credence to this…the leaders in the space appear to have bottomed in the market.
Am I calling a bottom in the market? By no means; the slowing economy and global credit crunch will create further dislocations in the overall financial marketplace for a while to come. However, what I do believe is happening are select equities suffering disproportionate levels of selling that are creating unique buying opportunities for investors with a clear head and a vision to the future.
Taking proper advantage of the buying opportunities requires two things: an understanding of the longer term fundamentals of an industry, and knowledge of the particular business prospects of individual firms. Judging by my byline, ChinaStockGuru, you might assume I’m a fan of certain Chinese companies at this time: you’d be right.
When looking at China, take off the rose colored glasses. China’s economy might be growing at 9% this year and next, but it’s a growth that will only benefit certain sectors and companies. The days of heady manufacturing growth in China are over; avoid low margin, mass production industries like toys and television manufacturers. On the contrary, there are two trends in China that are nascent and will grow for the indefinite future: clean technology and consumerism. While the stocks focused here have suffered equal damage to their manufacturing peers, the fundamentals are stronger and these stocks will be the first to rebound and will trade to premium multiples after the shakeout has reached its end.
Today I’ll mention two companies that I feel have suffered disproportionate pain to their future prospects. Both of these companies are profitable, growing and focused on markets that will continue to develop despite the global turmoil.
A-Power Generation is a manufacturer of wind turbines and distributed power generation systems in China. Quite simply, China needs more power and they need more clean power generation. This company is ideally suited to benefit from growth in China as well as the efforts of the Chinese Central Government to clean up the environment. China has money: these are areas where spending will continue regardless. A-Power is expected to earn as much as $1.25 in 2009. In good times, A-Power could expect to trade at thirty times earnings. It was a $32 stock just two months ago. The bargain basement price is now under $8, or around 6 times forward earnings. Buy this here and now.
Jingwei (NASDAQ:JNGW) is a consumer marketing firm based in Shenzhen. Focused on assisting companies in their marketing to the consumer, Jingwei has seen tremendous growth. With the growth of the middle class in China, consumer focused companies such as Proctor & Gamble (NYSE:PG), Best Buy (NYSE:BBY) and Nokia (NYSE:NOK) have been increasing their marketing programs and budgets to attract this group. All three, among other major corporations, are current Jingwei clients. Jingwei has multiple analyst coverage and, according to them, is expected to earn 84 cents per share in 2009, a wonderful P/E of 3 at this depressed level. How does management feel about their prospects? They have been buying stock and so should you.
It’s difficult to go against the tide and be a buyer when others are selling. However, we are in a market unlike any seen before. A market in which fear and despair have overwhelmed rational decision making to a scale unheard of in prior bear markets. The number of hedge funds in existence, and those soon to be out of existence, has a direct correlation to the increasingly violent gyrations in the market and individual stocks. Do not let their fear impact your decision making process. Now is the time to strip off the cloak of despair and show off your bathing suit: go ahead, stick your toe in the water. Buffett’s already splashing around and he wants the pool to himself, but there’s room for more swimmers.
Disclosure: I own shares in APWR and JNGW.OB.