Opportunities in Cheap China Stocks

Editor's note: The following article was written by Maj Soueidan, the founder of The Markets Edge Hedge Fund and GeoInvesting. Soueidan's "GeoTeam" of researchers and analysts uses fundamental criteria to analyze micro- and small-cap stocks.

NEW YORK (TheStreet) -- Recent developments with some U.S.-listed China stocks have created compelling investment opportunities.

I have never been a fan of investing in penny stocks, but recent market turmoil and some of the China reverse-merger deals have caused the shares of some profitable Chinese companies to sell for pennies, and for far less than book value.

Book value isn't the most important criterion when valuing stocks, but in certain cases it can be a useful tool, particularly when a company is trading for less than its book value but is seeing its earnings per share grow.

Obviously, one must ascertain why a stock is selling for less than its book value. It happens in the China sector for three major reasons: capital structure, liquidity and lack of exposure. I have found that companies that can address these issues eventually see their stock prices gravitate toward their book values. The key for investors is to identify companies that have catalysts for positive change. The table below contains examples of such stocks that we identified and then saw recover.

The beauty of most of the following examples is that not only were they selling for less than book value when we found them, but they were growing their earnings and/or had bright futures. In other words, they had the ideal combination of value and growth.

That said, our initial goal with this strategy is to identify stocks for which the market will reprice risk away from a failure assumption.

China Penny-Stock Turnarounds Symbol Date and Price Mentioned on GeoInvesting Book Value per Share Catalyst for Change High Price Since Initial Mention on GeoInvesting China Carbon Graphite (OTC BB:CHGI) 7/1/09 @ $0.75/shr $2.61 Improved capital structure $1.98 Orient Paper Inc (OTC BB:OPAI) 5/22/09 @ $0.42/shr $0.86 Net working capital turned positive; hires IR firm $1.50 Home System Group (OTC BB:HSYT)* 7/8/09 @ $1.35 $0.24 Restructures debt payments $2.96 China Kangtai Cactus Bio (OTC BB:CKGT) 8/14/09 @ $0.95 $1.51 Hires IR Firm $1.80 China Agritech Inc (NASDAQ:CAGC) 8/17/09 @ $11.00 $11.64 Accounts receivable situation improving $15.80 Asia Cork Inc (OTC BB:AKRK) 8/20/09 @ $0.27 $0.57 TBA** $1.01 *Stock was not selling below book, but had potential liquidity issues **The GeoTeam is currently investigating the Asia Cork story. Investors are urged to do their own due diligence before making conclusions.