I used to love Chinese stocks. Four years ago, I owned several
in my personal portfolio. Investing in China seemed like a
no-brainer.
We could buy a piece of a country that was emerging into the
largest economy in the world. It was like being transported back to
the United States in the 1880s or Japan in the 1950s, just as those
two countries were breaking out into global super stars.
As more Chinese companies listed on the U.S. exchanges, it provided
an even easier way to invest in the Chinese growth story. I was no
longer limited to ETFs or mutual funds. I could invest in
individual stocks themselves.
Even the Great Recession didn't turn me off to Chinese stocks.
After a huge government stimulus kicked in, China's economy came
roaring back. Once again, it seemed like a great time to get into
China's future restaurant chains, oil explorers, and industrial
companies.
Reverse Merger Nightmare
Then came the problems with the reverse merger companies. These
were smaller cap companies that used the reverse merger structure
to take themselves IPO. Scandals and allegations of fraud erupted
with several of these companies putting a taint on the entire group
of small cap Chinese stocks.
Research firms specializing in shorting became famous for issuing a
negative report on a small cap Chinese company only to see the
stock plunge 30% to 40%. No one, it appeared, was safe.
Then questions started about their accounting techniques. Despite
some Chinese companies using western auditing companies, video of
abandoned shipping docks at Chinese manufacturing plants, which
should have been teaming with employees and shipments, started
appearing on the Internet to discredit some companies.
Fleeing U.S. Exchanges
To avoid the embarrassment of overzealous American investors and
research firms, several Chinese companies have simply decided to
exit the U.S. equity markets. According to a
recent article in Bloomberg Businessweek
, the China Development Bank is spending $1 billion to buy back
shares of several small Chinese companies currently listed on the
U.S. exchanges so they no longer have to deal with the messiness of
being listed.
These companies include
Fushi Copperweld
(
FSIN
) and
China TransInfo Technology Corporation
(
CTFO
), both which are Zacks #3 Rank (Hold) stocks, and have market caps
under $500 million.
There's Always Risk
There are always risks in investing. Risk is not limited simply to
Chinese stocks. American companies have had accounting scandals and
disgraced CEOS just the same.
But there appears to be less transparency in Chinese companies.
This lack of information, combined with aggressive short selling
research firms, has proven to be a devastating combination.
What About The Big Cap Chinese Stocks?
Whenever I tell someone that I've broken up with all my Chinese
stocks I inevitably get asked, "Even the big cap ones?"
By "big cap" they mean companies like Baidu, PetroChina and China
Mobile. More analysts cover these companies than the small caps and
two out of the three actually pay sizable dividends.
Many investors consider dividend paying companies to be golden
because it's hard to "fake" the actual cash that goes to
shareholders. Although, the safety of dividend paying companies is
relative. Plenty of big cap dividend paying banks ceased to exist
during the financial crisis.
But the big cap Chinese stocks have inherent risks as well. Baidu,
for instance, operates at the whim of the Chinese government which
could shut down the web portal at any time. It's just too much of a
risk for me. I can buy U.S. or European companies in the same
industries where there is more transparency and I have a better
understanding of the regulatory risks.
3 Big Cap Chinese Stocks
What about those "better" Big Caps?
Baidu
(
BIDU
), the Chinese search engine, is a Zacks #3 Rank (Hold). It has a
market cap of $29 billion. Given that it's in the popular
technology sector, plenty of analysts cover the company. There are
16 estimates for 2012.
Shares have come down off their 2012 highs, making this stock more
attractive. But it still trades at 23x forward estimates which
isn't exactly cheap.
PetroChina
(
PTR
), one of the largest integrated oil companies in the world with a
market cap of $220 billion, is a Zacks #3 Rank (Hold). It pays a
dividend with a 3.8% yield.
There are 5 estimates for 2012. The $74 billion Statoil has 7
estimates and France's Total has 9 estimates with a market cap of
$104 billion.
Shares have slid in 2012 as the oil market turned rocky. The
company now has a forward P/E of just 8.8.
China Mobile
(
CHL
) is one of China's largest telecommunications companies with about
670 million customers. The company is a Zacks #4 Rank (Sell). It
has a market cap of $222 billion and pays a dividend of 3.7%.
Yet despite the size of the company, Zacks only has 3 estimates for
2012. By comparison there are 4 estimates on Cellcom Israel, with a
market cap of just $600 million.
Shares have held up well in 2012 however as investors are
anticipating the release of the iPhone in China.
Chinese Stocks Hit The Skids But I'm Still Not
Buying
With the recent slowing in the Chinese economy, the Shanghai Index
has fallen to a low last seen in March 2009, at the height of the
financial crisis.
A few years ago, I might have thought this was a buying
opportunity. But even with the sell off, I'm staying clear of
Chinese stocks. Maybe I will have missed the opportunity of a
lifetime because I lumped all Chinese stocks in one basket.
But I'm still seeing negative headlines about missing CEOs and
missing money coming out of China. As an investor, I'm staying
broken up.
But like all relationships, there's always a chance at
reconciliation somewhere down the road.
Tracey Ryniec is the Value Stock Strategist for
Zacks.com
. She is also the Editor of the Turnaround Trader and Insider
Trader services. You can follow her on twitter at
@TraceyRyniec
.
BAIDU INC (BIDU): Free Stock Analysis Report
CHINA MOBLE-ADR (CHL): Free Stock Analysis
Report
PETROCHINA ADR (PTR): Free Stock Analysis
Report
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