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The Cheapest Stocks in China

By: David Sterman
Posted: 7/21/2010 11:28:00 AM

Get ready for the China collapse. Virtually every major media outlet has weighed in with dire reports that the Chinese economic miracle is about to come to an abrupt end. These Chicken Littles note that any strong asset class that looks like a bubble must come crashing down. In the United States it happened with dot-com stocks, it happened in the housing market -- and it will surely happen in China. Or so they say.

Never mind that Chinese economic figures show few signs of cooling. Or that Chinese consumers are joining the middle class at a fast pace. Or that these consumers are buying up goods and services out of their savings rather than the U.S. predilection for debt-fueled spending binges.

Slowing Down From Warp Speed

That's not to say China doesn't face some challenges. Too many office buildings have been built, which will lead to some troubles for the banking sector. And the European economic slowdown is crimping exports. So it's not likely that China will maintain the robust growth rates of +8% to +10% exhibited during the last five years.

But even an economy that grows at a steady +4% to +5% pace would still represent a great opportunity for global investors. And China is unlikely to cool much below that rate. The country's decade long run of rising cash reserves allows the government to stimulate its way out of any unexpected speed bumps. The key is to further develop domestic consumption by continuing to create the conditions that bring more workers into the middle class. That's good for China -- and its trading partners.

We screened for a list of U.S.-listed Chinese companies that are worth at least $200 million. We then narrowed the list to companies that trade for the lowest forward price-to-earnings (P/E) ratios. The results are in the following table.

Company (Ticker) Market Cap. ($mill.) 7/20/10 Price Cash/Share 2010 P/E 2011 P/E
China Security
(Nasdaq: CSR)
350 $5.09 N/A 4.5 3.9
China Gerui Materials (Nasdaq: CHOP) 222 $5.17 $2.56 5.4 4.6
Yongye International (Nasdaq: YONG) 336 $7.55 $1.14 7.6 5.2
Fushi Copperweld
(Nasdaq: FSIN)
301 $8.18 $2.22 6.4 5.5
A-Power Energy
(Nasdaq: APWR)
343 $7.62 $3.45 7.6 5.7
Cogo Group
(Nasdaq: COGO)
231 $6.45 $2.97 8.4 7.4
China XD Plastics
(Nasdaq: CXDC)
272 $6.25 N/A 10.1 7.6
Shanda Games
(Nasdaq: GAME)
1,780 $6.18 $1.45 9.0 7.9
Deer Consumer Products (Nasdaq: DEER) 253 $7.69 $2.31 10.3 8.0

My favorite names in the group:

Action to Take --> Here in the United States we talk about stocks being cheap when their price-to-earnings (P/E) ratio falls to around 10 or 12. Yet many Chinese stocks trade for half of that multiple, as the table above indicates. These companies may have hiccups along the way, but they have been and will be great growth stories. When sentiment about China turns, these stocks could quickly zoom ahead. It may happen next month, It may happen in two years. So patience is a virtue.

-- David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and has made numerous media appearances over the years, primarily on CNBC and Bloomberg TV. David has a master's degree in management from Georgia Tech. Read More...

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.