This Chinese Stock Could Take Off Tomorrow

China: Still the Big Dog

Many People Underestimate China

This Chinese Stock Could Take Off Tomorrow

When I tell my friends that I just got back from Orlando, they look at me expectantly, waiting for news of many happy hours romping through Disney World, Sea World, Universal Studios or hacking the turf at a golf course. They scan my forehead for signs of sun.

They seem disappointed when I tell them that I didn’t get out of the hotel.

Well, why would I? It rained the whole time I was there and the temperature didn’t get above 55 degrees on my first two days. They tell me it got up into the 60s on the day I left.

But I didn’t mind. I went to Orlando to speak at the World Money Show about why China is still The Big Dog when it comes to emerging markets investments.

I have to admit that there were a few skeptics at my presentation. Emerging markets stocks have been mimicking the behavior of their developed market peers, sending stock prices and indexes down, down, down. And buying Chinese stocks during a bear attack didn’t seem like a good idea to them.

Fortunately, it doesn’t seem like a good idea to me either.

My argument wasn’t that pouring money into Chinese stocks is a good idea every time and all the time.
My contention is that when China is hot, it’s the best hunting ground on earth for growth investors.
I think the two charts below will tell the story.

This chart shows the performance of Chinese stocks that trade on U.S. exchanges as ADRs as represented by the PowerShares Golden Dragon Halter USX China ETF (PGJ) compared with the performance of the broad emerging markets, as represented by the iShares MSCI Emerging Markets ETF (EEM). The chart covers the period from the beginning of 2013 through February 3, 2014.

It’s no surprise to me that the performance of Chinese stocks is so dominant, but I think it will be to many people.

The second chart compares the performance of Chinese ADRs to the S&P 500 Index. U.S. large-cap stocks had a very good year in 2013, but it’s clear that Chinese stocks still blew their doors off.

Yes, Chinese stocks have declined more than U.S. stocks in the correction that started in late January. But if you have a set of rules that will get you out when markets turn negative, it’s pretty clear where the profits lie.

Chinese stocks aren’t for everyone. You have to have a high tolerance for risk. If high volatility makes you come out in hives or ruins your digestion, they’re not for you.

And if you can’t bring yourself to follow rational investing rules, you might also want to look elsewhere. Selling losers and going to cash when markets turn against you is the first requirement for investing in risky growth stocks. If you can’t cut bait and run in bear markets, it’s best not to start.

But if you can follow the rules and have the temperament for it, emerging markets stocks are a fascinating place to look for profits. Cabot China & Emerging Markets Report, which I write, enjoyed a 50.1% return for 2013.
Yes, that follows a couple of years when returns were not so hot. But the only way to know when China stocks are ripe for the picking is to keep looking. Or you can let me look for you.

I can guarantee that you will never miss a major market upmove and never sit like a lump doing nothing in a major market downmove.

I hope you’ll join me. 

My stock pick for the day is a Chinese stock you’ve probably heard of. It’s Baidu (BIDU), a company that’s often called “The Google of China.”

Baidu is the dominant Chinese-language search engine, and it makes money in exactly the same way Google does, selling ad words to advertisers who want access to people who are searching particular topics.

It’s a lucrative business, and Baidu’s earnings have soared from 66 cents per share in 2009 to $4.84 in 2012. Revenue in the same period is up from $651 million to $3.55 billion.

In some ways, Baidu has fallen victim to its own success. Investors stopped believing that the company could continue to grow at such high rates and sent the stock into a correction that lasted from August 2011 to April 2013, pulling the stock from 166 to 83.

But once BIDU got moving in July 2013, it soared to 140 in just four weeks. And its advance continued to 174 in January.

The global slump in stocks had BIDU at 149 on Monday, but today will be a big day for the stock. Baidu will report earnings today after the market closes, and if the news is good, this recent correction will make the stock a great bargain. Analysts are expecting EPS of $8.21 for Q4 and $30.45 for the year. Revenue is estimated at $9.23 billion for Q4 and $31.6 billion for the year.

I don’t favor buying ahead of earnings; it’s too much of a coin flip. But if the reaction to Baidu’s news is positive when markets open tomorrow, it will be a great opportunity to jump in early. This is a Chinese stock with plenty of horsepower.

To receive further updates on BIDU as well as additional growth high-potential emerging markets stocks, click here.


Paul Goodwin
Chief Analyst of Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory

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