Investment Strategy For 2010

by Maj Soueidan, President GeoInvesting

Noise Creates Pullback. It has been a turbulent few weeks for U.S. listed China stocks. The financial markets were initially spooked by China’s decision to enact soft liquidity tightening measures that included a temporary restriction of lending in January and an increase in reserves for some banks.

 This news combined with the sharp run-up the China sector has experienced and concerns over debt problems in Portugal, Spain and Greece gave investors an excuse to lock in profits.

 There have also been ramblings by skeptics that China is the midst of a real-estate bubble and that its banks are overextended with risky loans that could lead to a credit meltdown. This is all the more reason for China to be proactive!

 I have never claimed to be an expert on macroeconomic events nor will I start now. If Bernanke and his esteemed team can’t get it right my chances are doubly limited. But I will say this: it seems a little too early to proclaim China’s growth story game, set, and match.   It is illogical to paint as a bleak a picture as pundits would have it, asserting that China growth is “fake-fueled” only by stimulus.

 Whether they like it or not, history shows that appropriate fiscal stimulus is needed to spark a recovery. And be sure, China has the capabilities for more stimulus funds if required, which it will deploy if necessary. I find it amusing that the half-glass-empty camp moans that the Chinese leadership is embarking on goals to slow growth from 10.7% to around a targeted 8% growth. The latter was always the expectation, and now it’s not enough? I see nothing wrong with China’s proactive move as the government obviously sees strong signs of future growth and is taking early steps to control inflation and possible bubbles. These are moves that the current critics claimed we should have enacted during the pre-2008 expansion to avoid economic disaster. 

Thus Far in 2010: News from China is Bullish

• China exports recently turned positive
• The IMF just increased its global growth forecast.
• China lifted its January loan restrictions and makes comments saying that it is committed to growth and low inflation.
• Australia coal contract with china. Biggest ever show global growth is gaining steam.

I prefer to also listen to companies such as Orient Paper (NYSE AMEX:ONP), China Agritech Inc (NASDAQ:CAGC), China Fire & Security Group (NASDQ:CFSG), and Telestone Technologies (NASDAQ:TSTC) that have begun to preannounce solid 2010 financial expectations to guide my current outlook.

Pull backs are healthy. To abandon China now, especially after the sectors retreat, would be foolish. I am not sure that investors have a choice. Where else do you have companies consistently growing EPS at 30%+ and selling at ridiculously low valuation multiples? I believe that once U.S. investors really discover this hidden market it will only get better. Volatility will still persist due in part to what I believe is an overall lack of investor participation.

Dilution Could Limit Opportunities. Although I view the pull back in Chinese shares as healthy that will likely present a gift for investors who have the cahanos to put their money to work, we certainly have to be more selective and remain cognizant of risk this time around. One of the major risks that could put a slight damper on opportunities is the amount of equity some Chinese firms are raising at insanely cheap valuations. This could obviously limit P/E expansion. I am hoping that financing terms will improve as more investors find this space and balance supply and demand, helping to reduce volatility. Also, keep in mind that due to the Chinese New Year, the first quarter is typically weak for many Chinese firms.

Global Recovery in its infancy. We have to remember it has only been a year from ‘economic doomsday’ and the rest of the world has barley begun to contribute. As long as global governments stay committed to maintaining tenacious recovery policies and technology innovation forges ahead, I am hopeful a slow recovery will be sustained. This can happen despite political rhetoric, such as Obama’s muted attempts at socialism. In the end, I prefer not to fight the Fed and world governments, a battle that could end in regret. Last week’s positive news outlining a plan for Greece’s debt problems is a case and point.

My 2010 Strategy. In 2010, I have begun place emphasis on U.S. Micro-Cap plays as they have lagged the Chinese stock moves. If you search hard enough, you will find many smaller firms that are experiencing nice upticks in revenues and earnings per share. These are the same companies being overshadowed by the lackluster top-line growth of their larger cap counterparts.

Even though I am still bullish on China, I have to be cognizant that its government measures to control growth could negatively impact investor psychology, leading to volatility in the sector. Thus, I will still selectively invest in China and increase the weight of micro-cap U.S. investments to tame my portfolio’s volatility. 

Stocks to Follow in 2010

* As of February 12, 2010
** All but a few are selling at very low P/E to growth ratio (PEG)
*** Emphasis on Japan

See Five Stocks Set to Thrive in 2010 - CHBT, NEWN, HFGB, BOFI, IEC

GeoInvesting.com Disclosure

Positions: Long ONP, CAGC, HFGB, TSTC, APT, ASTC, BKI, BOFI, CVU, IEC, EKCS, OBNI, WILC, BSPM, CCME, CHBT, CNYD, NEWN,

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